• Bloomberg


Volkswagen AG’s admission that it cheated to make its diesel cars appear cleaner-burning leaves it facing billions in fines, its executives risking criminal charges and its U.S. expansion plans in tatters.

VW has admitted to systematically cheating on U.S. air pollution tests for years, the Environmental Protection Agency announced Friday in citing violations that could total $18 billion in fines. The company said it has also heard from the Justice Department, and the EPA said Justice could pursue criminal prosecution.

The German automaker has struggled to gain a foothold in the world’s second-biggest car market with a strategy built in part on touting the efficiency of fun-to-drive “clean diesel” vehicles that have now been shown to be anything but.

“It’s a huge black eye for Volkswagen,” said Matt DeLorenzo, managing editor for news at Kelley Blue Book in Irvine, California. Consumer Reports magazine reacted by suspending its “recommended” rating of two diesel models.

Diesel versions of the popular Beetle, Golf, Jetta and Passat comprise more than a quarter of the brand’s sales in the U.S. and are a vital part of the company’s strategy for meeting tougher U.S. fuel economy standards that will go into effect in the coming years. More than other carmakers, VW has chosen to focus on diesel technology instead of electrics or hybrids.

“They were counting heavily on diesels to meet the fuel-economy numbers. This brings that whole strategy into question,” DeLorenzo said.

Volkswagen admitted it sold 2009-2015 diesel Volkswagen and Audi cars with software that turns on full pollution controls only when the car is undergoing official emissions testing, the EPA said, calling the algorithm a “defeat device.” During normal driving, the cars pollute 10 times to 40 times the legal limits, the agency estimated.

Volkswagen, based in Germany, said it is cooperating with the investigation and was unable to comment further.

The EPA, working with the Justice Department, is likely to push for a stiff fine because there are clear violations of the law and harm to the environment, said Margo Oge, former director of the agency’s Office of Transportation and Air Quality. VW’s competitors were spending more money on systems to comply with the law and help the environment.

“My hope is the agency will send a strong message to the rest of the industry,” Oge said. “You want to make it clear that this isn’t acceptable.”

The closest parallel to the Volkswagen case was a group of truck makers that used devices to suppress diesel-pollution controls to improve fuel economy, Oge said. That case, settled 15 years ago, resulted in fines of more than $1 billion, she said.

The potential financial liability is unclear. EPA could fine the company $37,500 per violation, said Cynthia Giles, the agency’s assistant administrator for enforcement. With 482,000 autos part of the case, the total could be more than $18 billion. EPA allegations that automakers violated environmental rules often are settled for far less than the maximum possible fine.

Hyundai and Kia agreed last year to pay a $100 million civil penalty to resolve Clean Air Act violations based on their sale of more than 1 million vehicles that emitted more greenhouse gases than they had certified to the EPA.

Lawyers familiar with automotive law say the company could face criminal exposure if prosecutors agree with the EPA’s assertion about the defeat device. The Clean Air Act contains criminal provisions that apply to tampering with monitor devices, as well as making false statements to the EPA.

“What is so damning is that this was something actively pursued. This isn’t an oversight,” said Bloomberg Intelligence auto industry analyst Kevin Tynan.

Someone at VW had to decide that cheating the system was going to be a better use of time, money and resources than meeting the regulatory requirements, Tynan said.

Including diesel models from the company’s Audi and Porsche brands, Volkswagen AG accounts for 63 percent of diesels sold in the U.S., he said.

Volkswagen was sued Friday in federal court in San Francisco in a consumer class-action case alleging that the defeat device has caused vehicles to lose value. Consumers wouldn’t have bought the vehicles or paid as much as they did for them if they had known about the defect, and stand to spend more on fuel when the cars are modified to comply with emissions standards, according to the complaint.

While Volkswagen is a global giant with the long-standing goal of surpassing Toyota Motor Corp. as the world’s largest and most profitable automaker by 2018, it continues to struggle in the U.S., the most lucrative market. VW brand’s U.S. sales fell 2.8 percent this year through August, while industrywide sales rose 3.8 percent.

Now the company’s targets are at risk, said DeLorenzo. It has always been expensive and difficult to tune diesel engines in a way that meets pollution regulations, he said. VW may have found it easier to write software that passed EPA tests than compromise the way its diesels drive, he said.

The EPA and the California Air Resources Board said their investigations are continuing.

“We’re not discussing what the California fines might be at this point,” said David Clegern, a spokesman for the California Air Resources Board, in an e-mail Friday. “Our priority is to get these vehicles into compliance and proceed from there. A recall is really the only way to do that.”

Volkswagen was deliberately creating more pollution for the people they were trying to sell clean diesels to, said Dan Becker, director of the Safe Climate Campaign, a Washington-based environmental group.

“This is one of the companies that’s been trying to get Americans to buy diesels,” Becker said. “They’ve banked their future in a significant way on diesel. They assumed the EPA would never catch them at it, and that was a huge risk.”

Consumers haven’t yet been ordered to return to their dealers for a recall, and it is safe to keep driving the cars, said Janet McCabe, acting assistant administrator of the agency’s Office of Air and Radiation.

Last year Ford Motor Co. was forced to lower mileage estimates and compensate more than 200,000 customers. The company sent out payments ranging from $200 to $1,050.


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