Volkswagen AG is in advance discussions with the U.S. Department of Justice and U.S. Customs and Border Protection on a $4.3 billion settlement that will have the automaker plead guilty to criminal charges related to its emissions scandal, a company spokesperson has confirmed.
The revelation follows the Jan. 9 arraignment of Oliver Schmidt, who headed up the automaker's regulatory compliance office and engine development. He was charged for his role in a decade-long conspiracy to defraud the United States, conspiracy to defraud Volkswagen customers using interstate wires, and conspiracy to violate the Clean Air Act, according to the criminal complaint unsealed on Jan. 9.
"Volkswagen AG further confirms market rumors that the company negotiated a concrete draft of a settlement agreement with … U.S. authorities which contains criminal and civil fines with a total amount of USD 4.3 Billion as well as measures to further strengthen compliance- and control-systems, including the appointment of an independent monitor for the next three years," the automaker said in a statement issued to F&I and Showroom and Auto Dealer Today. "Further, part of the settlement agreement is a guilty plea regarding certain U.S. criminal-law provisions and a statement of facts on the basis of which the fines have to be made."
The agreement still requires approval by the automaker's management board and the supervisory board, which, according to the statement, could come as soon as Wednesday. It also requires approval from U.S. authorities.
Schmidt, according to a New York Times report, was arrested on Saturday, Jan. 7, and made his initial appearance on Jan. 9 before U.S. Magistrate Judge William C. Turnoff of the Southern District of Florida. According to a separate Bloomberg report, arrests of other high-level Volkswagen executives based in Germany were expected.
According to the complaint against Schmidt, VW employees based in Germany began designing a new EA 189 2.0-liter diesel engine — referred to as the Gen 1 engine — in 2006 as part of a new project to sell "clean" passenger diesel vehicles in the United States. Engineers, however, realized they would not be able to design a diesel engine that would meet the stricter U.S. standards that would become effective in 2007. To remedy this, they began designing and testing a defeat device software that would recognize whether a vehicle was undergoing standard U.S. emissions testing on a dynamometer or being driven on the road under normal driving conditions.
If the software detected that it was being tested, the vehicle would perform in a mode that would satisfy U.S. Environmental Protection Agency (EPA) standards. If the software detected it was not being tested, it would operate in a different mode. According to the complaint, the vehicle would emit substantially more NOx — at times more than 40 times higher than U.S. standards.
The defeat device was first installed in the 2009 model-year "clean diesel" vehicle. And after successfully selling the defeat device-equipped Gen 1 vehicles in the United States for a few years, the automaker began working on a second generation diesel engine — referred to in the complaint as "Gen 2" — which would also contain the defeat device software. The Gen 2 engine was included in vehicles sold in the United States in or around 2011. This continued up until the manufacturer's model-year 2016 vehicles.
In March 2014, the German automaker learned of results of a study undertaken by West Virginia University's Center for Alternative Fuels, Engines and Emissions, which found that VW diesel vehicles emitted drastically different NOx values during road testing. About a month later, Schmidt, who was responsible for communicating and coordinating with U.S. regulatory agencies, including the U.S. EPA and the California Air Resources Board, as general manager for VW in Auburn Hills, Mich., received an email informing him of the study's discovery.
That same day, Schmidt wrote to a colleague: "It should first be decided whether we are honest. If we are honest, everything stays as it is. ICCT has stupidly just published measurements of NAR diesel off-cycle, not good." According to the complaint, VW employees referred to VW's North American Region as "NAR."
Schmidt was promoted to principal deputy of the head of engine development for VW around March 2015, and returned to the automaker's headquarters in Wolfsburg, Germany, where he played a direct role in VW's response to questions from U.S. regulators, according to the complaint. Around this time, U.S. regulators had discovered that VW diesel vehicles emitted substantially higher emissions when driven on the road than when undergoing standard U.S. emissions tests and had repeatedly asked VW for an explanation of this discrepancy.
According to the complaint, Schmidt — who was in direct contact with U.S. regulators about the matter — knew the reason the discrepancies were the result of the defeat device software. However, during multiple discussions, both in-person and through teleconference, with U.S. regulators, he lied about the reasons for inconsistencies.
Schmidt, along with other VW employees, continued supplying regulators with false reasons for why their vehicles were exhibiting such drastic differences in emissions during testing. It wasn't until Sept. 3, 2015, meeting in El Monte, Calif., that a VW manager formally admitted that VW had intentionally installed a defeat device in 475,000 U.S. 2.0-liter diesel vehicles sold in the United State from 2009 to 2015.
"Volkswagen continues to cooperate with the Department of Justice as we work to resolve remaining matters in the United States," the company said in a statement. "It would not be appropriate to comment on any ongoing investigations or to discuss personnel matters."
As for the involvement of other high-ranking executives, the complaint alleges that Schmidt and other employees briefed executive management in Germany on or about July 27, 2015, "regarding the existence purpose and characteristics of the defeat device." During the presentation, which included a chart showing possible consequences of a meeting Schmidt was schedule to have with the CARB the following week, including indictment, VW's executive management decided against disclosing the existence of the defeat device.
"In the presentation, VW employees assured VW executive management that U.S. regulators were not aware of the defeat device — that is the engine's ability to distinguish between the dynamometer and road mode," reads the complaint, in part. "Rather than advocate for disclosure of the defeat device to U.S. regulators, VW executive management authorized its continued concealment."
Editor's note: This news story first appeared on the website of F&I and Showroom, a sister publication of Automotive Fleet.
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