The company faces a potential $37,500 fine by the EPA for each Clean Air Act violation. That could lead to the automaker facing as much as $18 billion in federal penalties in total. To put that in comparison, General Motors just agreed to a $900 million federal penalty on Thursday after a Justice Department criminal investigation over its ignition-switch defect that led to at least 124 deaths, and Toyota agreed to a $1.2 billion penalty last year after several deaths were attributed to an acceleration defect.
The massive federal penalties stemming from auto recalls involving Toyota, Fiat-Chrysler, and most recently, General Motors may soon be dwarfed by the hot water German automaker Volkswagen now finds itself in. On Friday, the Environmental Protection Agency (EPA) issued Volkswagen a notice of violation, accusing the company of installing software in its 4 cylinder diesel vehicles in order to circumvent federal and state emissions standards. The software, known as a “defeat device” was installed in roughly 482,000 vehicles sold in the U.S., including 2009-2014 Jetta, Beetle, and Golf models, as well as 2014-2015 Passat and 2009-2015 Audi A3 vehicles. The defeat device was used to trick the EPA into believing that the vehicles passed the standards required by the Clean Air Act. The software can sense when the vehicles are undergoing emissions tests, turning on the emissions control features. Under normal driving however, the software shuts off the emissions controls, leading to the vehicles emitting up to 40 times the Clean Air Act’s legal threshold of nitrogen oxide.
Volkswagen has already admitted to investigators that the company placed the devices in its vehicles. It remains to be seen if the admission will lead to any leniency by regulators. The EPA’s assistant administrator for the Office of Enforcement and Compliance Cynthia Giles said in a conference call, “We intend to hold Volkswagen responsible, adding that, “VW was concealing the facts from the EPA, the state of California, and from consumers. We expected better from VW.”The EPA, along with California emissions regulators discovered the software after the International Council on Clean Transportation, along with researchers at West Virginia University questioned Volkswagen’s emission levels. The EPA declined to assign a motive as to why Volkswagen would install the defeat device, as both the Justice Department and the state of California, which issued a separate notice of violation, are continuing to investigate the matter.
The company faces a potential $37,500 fine by the EPA for each Clean Air Act violation. That could lead to the automaker facing as much as $18 billion in federal penalties in total. To put that in comparison, General Motors just agreed to a $900 million federal penalty on Thursday after a Justice Department criminal investigation over its ignition-switch defect that led to at least 124 deaths, and Toyota agreed to a $1.2 billion penalty last year after several deaths were attributed to an acceleration defect. Still, the EPA has said that the affected Volkswagens are safe to drive, and while a recall has yet to be issued, Giles said that the company will fix the vehicles at no charge. A formal recall of the nearly half-million vehicles is expected in the near future, however.
While it’s difficult to believe that Volkswagen will actually be forced to pay the entire $18 billion maximum penalty, the larger loss for the company is likely its reputation. The disclosure immediately nullifies the company’s “clean diesel” claim, as 20 percent of Volkswagen cars sold contain diesel engines. In an interview, AutoPacific analyst Dave Sullivan noted, “It totally goes against all of the marketing they have had of a clean diesel, that’s one of the biggest selling points for Volkswagen.” Kelly Blue Book’s managing editor Matt DeLorenzo said, “From an industry perspective, it may set back diesel technology as a means for auto makers to reach the requirements for high fuel economy.” Carmakers are gearing up for a 2017 review by the National Highway Transportation Safety Administration (NHTSA) regarding future EPA emissions standards that will require the companies to supply light vehicles that average at least 54.5 miles per gallon by 2025. The automakers are hoping to convince regulators to relax the criteria during the review.
Beyond the financial and reputational hits the company is facing, both Volkswagen and its executives could become the first major test case for the Justice Department’s change in policy towards corporate fraud, discouraging deferred prosecution agreements and instead focusing on charging individual who perpetrate the fraud instead. Giles refused to say whether or not the EPA made a criminal referral as a result of its investigation, which she claimed was ongoing. EPA spokesman Thomas Reynolds called the notice of violation, “an opening salvo” in the Justice Department’s investigation of the matter. Tyson Slocum, director of the advocacy group Public Citizen’s energy program called the infraction “several steps beyond the violations that we’ve seen from other auto companies.” Slocum believes that if the allegations are proven to be true, “we would see criminal prosecution.” The Justice Department’s policy change only applies to cases moving forward, with Deputy Attorney General Sally Q. Yates saying on Thursday that the Department would not “renege on verbal agreements,” referring to the policy shift in light of the recent General Motors penalty.
New York Times – Coral Davenport and Jack Ewing
USA Today – Nathan Bomey
Wall Street Journal – Amy Harder and Mike Spector