Dieselgate Drama

Volkswagen's Own Worst Enemy

VW building reflected in a puddle source bloomberg
VW's world is upside down, a fact the carmaker is only now addressing.
  • Why it matters

    Why it matters

    Volkswagen’s flawed handling of the emissions-rigging scandal could encourage U.S. regulators to push for steep penalties against Germany’s largest carmaker.

  • Facts

    Facts

    • Lawyers involved in Siemens’ mid-2000s bribery scandal say the engineering giant’s experience offers lessons for VW in how to deal with angry American regulators.
    • In 2008, Siemens agreed to pay hundreds of millions of dollars in penalties after admitting it had systematically bribed foreign officials.
    • Volkswagen could face steep fines in the United States over the company’s sale of about 500,000 diesel cars equipped with technology to cheat on emissions tests.
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Shareholders and others dependent on Volkswagen’s financial success want the company to do everything it can to limit fines for selling U.S. customers about 500,000 diesel cars equipped to cheat on emissions tests.

Lawyers who helped Siemens, another scandal-hit German firm that emerged from a bribery scandal and avoided a meltdown with U.S. regulators, say the Wolfsburg-based carmaker isn’t doing itself any favors.

In 2008, Siemens agreed to pay hundreds of millions of dollars in penalties after admitting that the company had systematically bribed foreign officials to win engineering contracts.

Attorneys who counseled Siemens after its bribery scandal erupted in 2006 are criticizing VW for ignoring advice that could help the automaker keep potential U.S. penalties in check.

Volkswagen reportedly consulted with Siemens after news of the carmaker’s emissions-rigging came to light. But a lawyer who spent months on the internal investigation at the engineering firm said: 'VW learned nothing.'

The lawyers, who spoke with Handelsblatt’s sister publication WirtschaftsWoche on condition of anonymity, said Siemens pursued a strategy that limited financial damage after the company admitted to bribery allegations.

Siemens was ultimately fined about $800 million (€707.8 million) – a fraction of the several billion dollars in penalties that the German company might have been forced to pay by U.S. regulators.

Siemens’ legal counsel argued that the company’s decision to fire top managers and undertake sweeping reforms during the bribery investigation reassured U.S. regulators that Siemens was serious about fixing its mistakes.

Volkswagen, by contrast, has largely failed to clean house among management since the scandal broke in September.

Although then-Chief Executive Martin Winterkorn resigned days after those details went public, the man who replaced him was not an outsider, but someone with a long history at Volkswagen and its subsidiary, Porsche.

The former Porsche boss, Mätthias Müller, had served as head of product management at Volkswagen from 2007 to 2010, when the diesel engine at the center of the scandal – the EA 189 – was introduced.

About 11 million cars sold worldwide including approximately 500,000 in the United States were equipped with software and other technology to cheat on emissions tests. U.S. authorities ordered VW to recall those vehicles.

VW, Europe’s largest carmaker, has set aside €6.7 billion to cover the costs for recalling and repairing the cars worldwide, but this figure doesn’t include possible legal penalties or compensation to customers who bought faulty cars. More than 500 lawsuits have been filed in the United States against the carmaker.

It has taken more than six months for VW to release the results of its own internal investigation of the so-called Dieselgate scandal.

A report produced by U.S. law firm Jones Day is expected at the end of April.

The ongoing high-profile debate over multi-million-euro bonuses for VW executives — most of whom were in positions of responsibility during the Dieselgate era — hasn’t helped. Not only are the bonuses based on ill-gotten profits, but the visibile wrangling over the issue could rub authorities in Washington the wrong way.

In the case of Siemens, the company’s supervisory-board chief responded to American pressure by pushing ahead with wide-ranging reforms after the bribery mess – a strategy that let the firm emerge from scandal with less damage.

Volkswagen reportedly consulted with Siemens after news of the carmaker’s emissions-rigging came to light. But a lawyer who spent months on the internal investigation at the engineering firm said: “VW learned nothing.”

U.S. authorities have ample leeway in deciding how much Volkswagen should have to pay for its deception, and experts say a series of missteps have put the company on thin ice in Washington.

Critics say one of VW’s blunders was its decision to install Hans Dieter Pötsch, its former finance chief, as head of the carmaker’s supervisory board, the body responsible for examining what went wrong.

Mr. Pötsch spent 12 years in his previous post as CFO and was long a close confidant of Mr. Winterkorn, who resigned five days after the Dieselgate scandal broke.

“The fact alone that Pötsch is tasked with investigating things that happened entirely during his time as the powerful head of finance may make the whole probe not credible in the eyes of U.S. authorities,” said a lawyer who played a key role in examining the Siemens scandal.

At Siemens, Heinrich von Pierer was forced to step down as head supervisory official five months after the bribery allegations came to light. The illicit payments were made during the time he served as Siemens’ chief executive.

There are also questions surrounding VW’s decision to give Manfred Döss, the head of the carmaker’s legal affairs department, a top position on the compliance board of Porsche. Mr. Döss’ job is to defend VW against potential lawsuits.

Asked to comment, Volkswagen said, “the complete investigation of these issues is the top priority for us.”

VW has also been criticized for conflicts of interest on its managing board. So far no evidence exists that the company’s current chief executive, Mr. Müller, had any knowledge of the emissions-rigging. But he served as chief of product management during a time when strict environmental regulations – particularly nitrogen-oxide pollution limits in the United States – were among the key challenges facing VW.

Nitrogen oxide, a component in exhaust from diesel engines, poses a threat to human health.

One person involved in the investigation of Siemens said it’s unlikely that U.S. authorities would consider Mr. Müller as a fresh start at VW. In Siemens’ case, the company’s supervisory-board chairman, Gerhard Cromme, refused to extend Chief Executive Klaus Kleinfeld’s contract out of concern about how it might be perceived by the U.S. Securities and Exchange Commission. Mr. Kleinfeld is now chief executive of Alcoa, the U.S. aluminum maker.

 

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“At VW, by contrast, they tasked a manager who held key roles during the time the scandal was taking place with handling the scandal’s aftermath,” a former investigator said. “That stands to strike any U.S. authority as objectionable, first of all.”

Some observers might also see a conflict of interest in the case of Ulrich Eichhorn, who is responsible for research and development at VW and for accelerating the company’s production of electric cars.

Before taking the job in late 2015, Mr. Eichhorn had spent four years as managing director of the German auto association, or VDA, an umbrella group representing industry’s parts suppliers and carmakers.

During his time at VDA, Mr. Eichhorn was involved in efforts that helped carmakers skirt tough air-quality regulations – primarily by retooling methods for measuring nitrogen-oxide emissions, according to documents seen by WirtschaftsWoche. While those readings were taken directly from a car’s exhaust pipe, German inspectors had to rely on readings from the vehicle’s European on-board diagnostics (EOBD), which VW manipulated.

In a letter to the German transportation ministry dated August 7, 2013, Mr. Eichhorn told officials there was no need to measure nitrogen-oxide emissions manually, since the EOBD numbers were very reliable – a move that kept carmakers, including VW, from having to comply with the call by the European Union’s executive branch for exhaust-pipe readings.

That Mr. Eichhorn should then go on to become the person responsible for cutting-edge research at Volkswagen made little sense, according to one of his former colleagues, who called it “a joke.”

U.S. compliance experts also fault VW executives for failing to show regret in the wake of the crisis.

“When it goes as far as it has with Volkswagen, then the U.S. authorities want to see one thing first and foremost: remorse,” said one American compliance expert – regardless of whether the top managers responsible for delivering the company’s apology are themselves responsible.

At a news conference in December, three months into VW’s troubles, Mr. Müller was asked whether he was planning to kneel down before American regulators during his trip to the United States, just two weeks away.

Volkswagen’s CEO grinned and said, “whether I’m planning to get on my knees – I don’t think so.” He also told reporters that he would apologize but also to display confidence and optimism.

Siemens executives, in contrast, were counseled on how to avoid angering U.S. regulators. Company managers were tasked with learning how to answer about 200 questions by heart, said a person involved in the case.

Mr. Müller’s trip to the United States in December was a mistake, since VW had neither completed a thorough investigation of the emissions case nor proposed a fix, according to one former consultant for Siemens.

The problematic statements made by Mr. Müller before and during his U.S. trip weren’t the only troublesome ones.

When journalists asked him why it was taking VW so long to release the results of its internal investigation, he said the carmaker couldn’t publish those findings until it could present the report at the annual meeting of its shareholders, then scheduled for April 21.

 

Mathias Mueller in a meeting, pauses during, bloomberg
Mr. Müller pauses during a meeting, caught unawares. Source: Bloomberg

 

Actually, companies are required to disclose market-sensitive information to all parties in a timely fashion.

Volkswagen has since delayed the shareholders’ meeting until June but still plans to release its report this month. VW would not respond to questions as to whether Mr. Müller’s comments put him on shaky legal ground, saying U.S. law firm Jones Day will examine whom to hold personally liable.

VW’s reluctance to help in that process could prove costly: According to a directive issued by the U.S. Justice Department in September, companies should be granted reduced penalties only if they help authorities in identifying individual wrongdoing.

That edict has its roots in the global financial crisis, when U.S. authorities struggled to prosecute bankers, forcing Washington to settle for steep fines against banks themselves.

A U.S. legal expert said authorities’ expectations will be exceedingly difficult for VW to meet, since it will mean giving regulators access to the company’s inner workings.

“But if VW does not clear this hurdle, all its other efforts will have been for naught,” the expert said. “They’ll be facing the maximum penalty.”

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Martin Seiwert is a reporter for German weekly WirtschaftsWoche, Handelsblatt’s sister publication. To contact the author: martin.seiwert@wiwo.de  

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