Volkswagen details what top management knew leading up to emissions revelations

In a public statement on Wednesday evening, Volkswagen AG said that its top executives had been briefed on issues relating to the diesel emissions scandal prior to the time that the Environmental Protection Agency (EPA) issued the company a Notice of Violation last fall. Still, the company maintains that its CEO may not have understood the gravity of the situation.

VW Group has previously been cagey about whether top executives knew that engineers had been installing illegal defeat devices in diesel vehicles. (The term “defeat device” here refers to lines of code in the engine management software.) So-called defeat devices suppress the car’s emissions control system when it’s being driven normally, allowing the system to work when the car is being tested in a lab. This setup resulted in diesel Volkswagens, Audis, and Porsches releasing many times the allowed limit of NO_x emissions every time the car got on the road.

If top executives knew about the defeat devices, they could face additional lawsuits from shareholders on top of the billions in fines that the EPA and the Department of Justice have sued VW Group for. The company also must account for the cost to fix or buy back the affected cars.

Volkswagen’s defense

VW Group’s public statement on Wednesday included a defense that the company submitted to a German district court the day before. The document comes from a shareholder lawsuit that claims VW did not inform investors that it was facing issues that would eventually send the company’s stock into a nosedive. VW Group said it wanted to make its defense statement public "to correct the selective and incomplete publication of documents in the media about the diesel matter and to avoid having partial excerpts of its statement of defense published in the media.”

The statement said that the diesel issue began in 2005 when VW decided to "start a major diesel campaign in the United States” to sell cars that were already quite popular in Europe. But as the US standards for NO_x emissions are much stricter than those in Europe, VW engineers "at levels below the Group's Management Board in the powertrain development division” decided to modify “a small number of an approximate total 15,000 individual algorithms” within the engine management software.

The earliest vehicles discovered to have a defeat device came to the market in 2009.

The company says that in May 2014, the California Air Resources Board (CARB) learned of a study that showed there were discrepancies between lab tests of a Volkswagen model's diesel emissions and the car's on-road results. VW says they looked into it, and in December 2014 the company offered a voluntary recall to Volkswagen diesel owners to update the software.

CARB has asserted that this recall did not change the discrepancy between emissions in the lab and emissions on the road for the diesel vehicles.

VW’s defense statement goes on to say that then-CEO Martin Winterkorn received two memos regarding the discrepancies between lab and on-road emissions—one in May 23, 2014 and one on November 14, 2014. Regarding the May correspondence, Volkswagen wrote, “Whether and to which extent Mr. Winterkorn took notice of this memo at that time is not documented.”

VW offers that Winterkorn might not have considered the diesel issue important at the time because "Emission deviations between test bench and road operation exist at all automobile manufacturers and are by no means automatically attributable to violations of regulations. For global automobile manufacturers, service measures and recall campaigns are nothing out of the ordinary.”

VW said that CARB came back to the company asserting that the voluntary fix the company offered in December didn’t actually correct the issue. At that point, VW said, the company’s product safety division “established a diesel task force” in the summer of 2015 and hired an American law firm "to advise Volkswagen with regard to questions related to the American emissions law.”

On July 27, 2015, according to VW, some employees brought up the diesel issue at a meeting attended by Winterkorn and VW’s chief of passenger cars Herbert Diess. “It is not clear whether the participants understood already at this point in time that the change in the software violated US environmental regulations,” VW wrote. "Mr. Winterkorn asked for further clarification of the issue.”

The company asserts that its Management Board did not realize that the software update constituted an illegal defeat device until August 2014, a month before the EPA issued a Notice of Violation to the company. The company went on to say that even at that point, it wasn’t afraid that the defeat device would cause a scandal because no other manufacturer had been punished dramatically in the past. As VW’s statement says:

Volkswagen was advised that in the past, defeat device violations under US environmental law by other car manufacturers had been sanctioned with settlement payments that were not especially high for a company the size of Volkswagen. Even the highest US fine by then, which amounted to USD 100 million and was imposed in 2014, was at the lower end of the statutory range of fines. This case affected about 1.1 million vehicles, which corresponded to a fine of not more than approximately USD 91 per passenger vehicle.

In light of this recommendation, it was expected that the diesel matter could be resolved with the US authorities by disclosing the software modification, agreeing on appropriate measures to restore vehicle compliance with the law and the payments of potential fines in line with prior US settlements.

VW seems to have dramatically underestimated how seriously the EPA would take the violations and how angry the American public would be about the deception. But it’s not wrong that many other companies had been discovered using defeat devices in the past, whether they were hardware- or software-based devices. VW had even been in this situation before in 1973, when it agreed to pay $120,000 to the EPA. It didn’t even have to admit wrongdoing then.