A Big Dent to the Beetle

bugBy Denise Kim

Once often ranked among the most dependable car brands, Volkswagen is now struggling to stay competitive following the fallout from its most recent scandal that has already led to the resignation of Volkswagen’s CEO Martin Winterkorn.

On September 18, 2015, the Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to Volkswagen alleging that Volkswagen and Audi diesel cars from 2009-2015 contain software that circumvents EPA emissions standards for certain air pollutants. Additionally, California issued a separate In-Use Compliance letter through the California Air Resources Board (CARB) with similar allegations. The scandal has affected the following VW cars: Jetta, Golf, Beetle and Passat models. Additionally, reports indicate that Volkswagen subsidiaries Audi and Skoda also installed deceptive software.

Reports from the fallout estimate that penalties for installing the deceptive software could top $18 billion, or $37,500 for each of the almost 500,000 offending cars sold in America since 2008. Unfortunately for Volkswagen, this appears to be only the beginning. The alleged $18 billion reported is in connection with 42 U.S.C. §7524(a), under which “any person who violates… may be subject to a civil penalty of not more than $25,000. Any such violation… shall constitute a separate offense with respect to each motor vehicle or motor vehicle engine.” The EPA also has a criminal enforcement program that pursues individual and corporate defendants who have committed serious environmental crimes. In addition, a violation of National Emission Standard for Hazardous Air Pollutants (NESHAP) under 42 U.S.C. §7413 could result in a 5 year sentence and additional fines. There may also be criminal penalties abroad. Employees held responsible could be prosecuted for fraud, which would result in fines and a maximum sentence of 10 years in prison under German law. Germany recently launched a criminal probe against Volkswagen’s former CEO Martin Winterkorn while the U.S. Justice Department is conducting a criminal probe.

Volkswagen will most likely reach a settlement to pay criminal fines similar to General Motors and Toyota. General Motors agreed to pay $900 million in criminal settlement on September 17, 2015 for failing to fix a deadly ignition-switch defect. Similarly, in 2014, Toyota agreed to pay $1.2 billion to settle the criminal probe into its handling of unintended acceleration problems.

In addition to the civil penalties from the EPA and possible criminal implications, the company also faces civil lawsuits. Thirty-four federal lawsuits have been filed against Volkswagen as well as several in Canada alleging that Volkswagen defrauded customers.

The recent notice of violation also helped to highlight the relatively lower auto-emissions standards in Europe under which Volkswagen may not be subject to additional penalties from the European Commission regarding faulty software.

As a result of the scandal, Volkswagen recently announced a tentative plan to refit vehicles affected by the malware, but unfortunately for Volkswagen, this may be a case of too little too late. Any proposed fix would have to be approved by government regulators but as of now, the company stated that in October, it would propose a fix and begin to notify owners of the vehicles for possible recalls.

The fallout regarding this incident has been immense and shows no sign of slowing. The money currently set aside by Volkswagen in anticipation of such aforementioned penalties will most likely not be enough to cover the damage. How these penalties will impact the company financially are uncertain at this point, but at this point it is clear that the software intended to defeat the emission tests has backfired and might defeat the Beetle company instead.

Image source: http://www.kimballstock.com/pr/255487456/KimballStock_AUT-35-RK0397-01.jpg.

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