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Volkswagen
Volkswagen Logo
Founded May 28, 1937, Berlin, Gemany
Founder German Labour Front
Headquarter Wolfsburg, Germany
Industry Automotive
Area Served Woldwide
Website https://www.volkswagenag.com/#
Volkswagen Emission Scandal Overview
Depiction of the Scandal
Period 2008 - Current
Areas Affected Global
Alternate Names Dieselgate
Issue Corporate Governance Failure
Causation "Defeat Devices" to alter emission limits
Important Individuals Martin Winterkorn, Rupert Stadler, Oliver Schmidt,

Michael Horn, James Liang, and Stuart Johnson

Vehicle Brands Involved Volkswagen, Audi, and Porsche
Legal Consequences Fines, Lawsuits, Prison Sentences, and Wanted Fugitives

Volkswagen Emissions Scandal ("Dieselgate")

The Study Results from The University West Virginia

Also known as the “Dieselgate Investigation”, the Volkswagen Emissions Scandal established itself as one of the largest and well known corporate governance failures of all time. After years of marketing and promotional activities surrounding Volkswagen's attempt to portray their diesel vehicles as a better alternative to hybrid or electric vehicles, this was proved to be a giant lie[1].

In 2014, US researchers at the University of West Virginia discovered that when Volkswagen's diesel vehicles were being tested on the road, the amount of emissions the car would produce was over the federal limit[2]. They had later discovered that Volkswagen had installed a “defeat device” within the vehicle's software that could detect if it was undergoing an emissions test[1].

When the vehicle knew it was undergoing a test, it would reduce the nitrogen oxide that was being emitted to below the testing standard allowing the vehicle to pass[1].

In September 2015, the US Environmental Protection Agency accused Volkswagen of negligence[2]. This followed with a response by Volkswagen admitting their wrongdoings, knowing that they had been caught. Lawsuits, fines and other repercussions soon followed Volkswagen and the individuals involved[2].


Timeline of Scandal

2014

·      Researchers discover that Volkswagen's diesel vehicles are not compliant with the federal limit on nitrogen oxide emissions[2]. Emissions, when the vehicle is not being

       tested, were proved to be up to 40% higher than legally allowed[2].

2015

·      September - US Environmental Protection Agency accuses Volkswagen of fraud by installing devices into their diesel cars that allow them to pass the federal emissions test

       when being tested[2].

·      September - Volkswagens admits to producing vehicles with a software that detects and reduces emissions during lab tests[2].

·      September - Volkswagen CEO Martin Winterkorn steps down from his position, claiming he had no idea of the scandal[2].

2016

·      April - Volkswagen reports in first loss in almost 20 years, disclosing that money has been set aside for the anticipated costs of the offence[2].

·      June - US settlement orders Volkswagen is ordered to pay 14.7 billion in buybacks, compensations and penalties[2].

·      September - First lawsuit filed by a Volkswagen investor claiming damages and accusing the company of not reporting the crisis in a timely manner[2].

2017

·      January - Volkswagen pleads guilty to fraud and other charges in the US, resulting in Volkswagen paying 4.3 billion in fines[2].

·      February - Volkswagen states that it would pay a minimum of 1.2 billion in compensation to US buyers and either buyback or refit the vehicles[2].

·      August - James Liang, one of Volkswagen's engineers, was sentenced to 40 months in prison along with a fine[2].

·      December - Oliver Schmidt, who was an executive at Volkswagen, was convicted and sentenced to prison for seven years[2].

2018

·      April - Herbert Diess replaces Matthias Mueller as CEO after Mueller was identified as being involved in the scandal[2].

·      May - Winterkorn is charged in the US for trying to cover up his cheating[2].

·      June - Volkswagen agrees to pay Germany a one-billion-euro fine and acknowledged their responsibility for the diesel crisis[2].

·      June - Rupert Stadler, Audi’s CEO and one of Volkswagen's subsidiaries, is accused of fraud and withholding evidence[2].

·      September - A Shareholders case is launched claiming damages of 900 billion euros[2].

·      October - Audi pays a fine of 800 million euros[2].

·      November - Verbraucherzentrale Bundesverband (VZBV), which is a consumer organization, files a large lawsuit against Volkswagen[2].

2019

·      January - Four of Audi’s managers are charged in the US[2].

·      March - US Securities and Exchange Commission takes legal action against Volkswagen[2].

·      April - Winterkorn, along with four other managers, are charged with fraud, unfair competition and breach of trust[2].

·      May - Porsche, another Volkswagen subsidiary, agrees to pay a fine of 535 million euros[2].

·      July - Stadler and three other Audi managers are charged with fraud[2].

·      September - Martin Winterkorn and two other Volkswagen executives are charged with market manipulation[2].

Key Players

Martin Winterkorn, Former Volkswagen CEO

Martin Winterkorn

Martin Winterkorn was Volkswagen's CEO from 2007 to 2015 and ultimately chose to resign one week after the scandal was revealed to the public[3].

It has been said that under Winterkorn's leadership, Volkswagen's culture revolved around fear and respect[4]. Winterkorn was a demanding boss who didn't like failure, which may have been the catalyst to how this whole scandal started[4]. He initially didn't even want to resign but was forced to step down as the depth and breadth of the scandal was revealed[5].

Martin Winterkorn initially claimed he did not know about the illegal devices, but it was later revealed that he might have known about them for years[6][5]. It has been alleged that he may have been aware as early as 2007, which would be right around the scandals inception[5]. While it is unclear whether Martin started the idea behind the scandal, or was simply complicit with it being CEO he had a duty of care that he breached again and again[5].

The Board of Directors

Experts have speculated that Volkswagen had governance issues way prior to this scandal and that this scandal should not come as a surprise[7].

The company has long been governed through unusual family control and by a select few shareholders who had majority voting power, lacking independent directors[8]. It has been said that outside ideas or views rarely, if ever, permeate[8]. It would seem that the Board was not acting in the interest of all stakeholders but for the select few with all the shares[8].

The chairman of the supervisory committee of the board is former CEO Ferdinand Piëch who started the culture of "growth at all costs" during his reign of the company[9]. Having him in charge of the board practically ensured that the culture at Volkswagen would continue to be solely focused on growing the company at all costs[9].

Furthermore, the Board was heavily focused on profit, production, and maximizing employment[8]. As they were focusing on the issues mentioned above, they were falling behind on environmental issues, which may have been why the Board began to cut corners instead of investing in the innovation they marketed[8].

There have also been rumours that the culture of the Board and the company did not believe in environmental protection laws or emission standards, and as such, this might have contributed to how this scandal was created and kept under wraps for so long[8]. Ultimately, the tone at the top of Volkswagen cared solely about profit, which would have created the culture needed to sustain the emissions scandal.

Rupert Stadler

Rupert Stadler The Former Chief Executive Officer of Audi

Rupert Stadler was the former chief executive of Volkswagen's Audi luxury car division and played a role in the diesel emissions cheating scandal[10]. Stadler actively assisted in selling the impacted vehicles, knowing they were not up to regulation[10]. It is still unclear whether Stadler was simply aware of the scandal and failed to do anything about it or whether he was involved in the initial planning of the defeat devices[10].

What we do know is that Stadler was fully aware of the manipulation and continued to allow the cars to be sold and failed to take any action and stop the manipulation when it was first detected[10]. He was negligent in protecting Audi's consumers and failed to demonstrate the appropriate duty of care[10].

Michael Horn

Michael Horn was the Volkswagen US president and CEO from early 2014 until he resigned in 2016, six months after the emission scandal news broke out, to pursue "other opportunities"[11].

Most think Horn left due to the possible legal repercussion that the scandal would have against him; it would seem he was also complicit in this scandal[12]. It has been alleged that he knew about the defeat devices and still actively worked to sell the cars in the US and that his resignation was so he could get out of the United States fast to avoid being arrested[12].

James Liang

James Liang was a Volkswagen engineer who had worked for the company over his entire 34-year career[13]. His lawyer alleged that he was a good honest, hard-working family man who was too loyal to Volkswagen, which ultimately led to his downfall[13]. Liang says he was simply a lower-level employee aware of the scandal and not the mastermind and that this scandal involved higher-level executives utilizing him as a scapegoat[13].

Liang was one of the few who knew how the technical side of how these defeat devices worked and decided to help cover it up, dating back to 2006[13].

Oliver Schmidt

Oliver Schmidt was the general manager of the engineering and environmental office in Michigan, United States, from 2012 to 2015[14]. He was aware of all the information regarding the rigged emission tests and how the German managers decided to turn a blind eye on it to continue to make profit for the company[14]. It has been alleged Schmidt saw the scandal as an opportunity to climb the corporate ladder and make a name for himself at Volkswagen if he helped cover it up[15].

In 2015, Schmidt met with California regulators over the alleged defeat devices, and he actively lied, saying he had no knowledge about the software[15]. After this meeting, Schmidt then destroyed evidence relating to the defeat devices in an effort to mislead the US investigators and minimize the potential impact of the scandal[15].

Later in 2015, he was “transferred” to Volkswagen Germany, where he continued to destroy evidence and cover up the traces of Volkswagen's faulty software[15]. Schmidt's transfer to Germany was also a safety net because US officials could not indict him when he worked in Germany[15].

Stuart Johnson

When the scandal broke, Stuart Johnson was head of the Volkswagen Engineering and Environmental office in Auburn Hills in the Detroit suburbs[16].

He was one of the whistleblowers of this scandal as he was the first executive to disclose Volkswagen’s criminal acts to US regulators[16]. Johnson worked under Oliver Schmidt, and this was how he got to know about the cheating[11]. However, there is still little known about how exactly Stuart found out about the scandal and ultimately decided to expose the scandal[16].

Other Whistleblowers

Other whistleblowers involved in exposing the scandal have decided to remain anonymous and leveraged their knowledge of the scandal to avoid being arrested[16].

Our Position
We believe that this scandal started at the top, with key players such as Martin Winterkorn and the Board.
  • This scandal was not simply Volkswagen being negligent in their emissions but it involved gross deceit. These defeat devices were not something that could've been installed without the knowledge and support of Martin and the board. Ultimately, any one of these executives could have stopped this scandal, yet none did, and once it was exposed, they denied or minimized their involvement.

Our reasoning comes down to the fact that in order for the defeat devices to be installed on so many vehicles, there would have been planning and thought put into how this would work. Martin, the other high-level executives and the Board, would have had to organize this to ensure it remained undiscovered, especially as it remained under wraps for years. It would have involved detailed planning and continual deceit for the years that this went on, and as such, they are most at fault.

  • This is further compounded by the tone at the top of the organization that didn't care about the emission standards or environmental laws and the complete lack of disregard for anything but profit.
  • Volkswagen tried to pass the blame onto a few engineers, but in our opinion, this doesn't ring true. Looking at all the above faults in their culture and governance, it is clear that Volkswagen had deficiencies at the top of the organization that would have allowed this scandal to fester and grow to the scale it did; also, the research is pretty glaring that these high-level executives knew what was going on the entire time[2].
  • While researching, we also found that Volkswagen tried to control the narrative at every turn. Over five years since this scandal, there's still a lot of secrecy about what the above players knew and when and what role they played. Our team thinks that going forward more details will still be revealed about this scandal and that the full truth will emerge.

Stakeholders/Stakeholder Groups Affected

Owners of Volkswagen Vehicles

The owners of these vehicles were significantly affected by this scandal as they were deceived, exploited, and left having to deal with the aftermath[17]. People bought these vehicles for the features advertised, especially the environmentally friendly aspect[18]. However, once the scandal was revealed, consumers started to doubt their trust in their vehicle and wondered what else Volkswagen lied about[18].

There were 10.5 million vehicles sold with the defeat device software installed before this scandal broke[17]. On a larger scale, all Volkswagen owners were impacted by this scandal. Once this was revealed, how could any Volkswagen owner trust their cars? That trust between the consumer and Volkswagen was broken. As a result, many owners now have this skepticism about the reliability of their vehicles, and many won't repurchase from Volkswagen again[18].

Employees of Volkswagen

Employees of Volkswagen, especially those directly involved in producing the vehicles affected, had to deal with the tarnish of this scandal for the rest of their careers[19]. Whether they were complicit or not, it will still tarnish their reputation going forward[19]. Volkswagen also eliminated 30,000 jobs as it overhauled its brand to try and recover from this scandal[19].

Volkswagen Itself

Prior to the scandal, Volkswagen was considered the most profitable car manufacturer in the world[20]. Volkswagen lost over a quarter of its market capitalization, roughly $42.5 billion, due to this scandal, and in 2020 it finally made its way back to its pre-scandal share price[19]. Nowadays, consumer trust is crucial for brand loyalty, and Volkswagen broke this trust, and as a result, they may never ascertain the reputation they had pre-scandal[19].

Audi

Volkswagen also owns Audi as their luxury car line, and they were also negatively impacted and complicit in this scandal[20]. As mentioned above, one of Audi's executives was directly involved in this scandal, and it seems that both Audi and Porsche had vehicles modified in similar ways to the Volkswagen cars[21].

Almost four years after the scandal broke, it was brought to light that Audi might have been even more complicit than previously thought, and they may have continued to sell affected vehicles after the scandal went public[22]. Documents dating back to 2008 shed light on how Audi knew they couldn't meet emission guidelines and was trying to figure out how to beat the system[22].

Porsche

Volkswagen merged with Porsche back in 2011[20]. Porsche was fined almost $598 million US for their lack of oversight in this scandal as they relied on diesel engines supplied by Volkswagen and did not do their due diligence to ensure these engines met emission guidelines[23].

Germany

As one of Germany’s most beloved brands, Volkswagen's scandal also negatively impacted the country's reputation and was a humiliation to the entire nation[19].

Volkswagen Direct Material Suppliers

Volkswagen suppliers also suffered a financial loss due to this scandal; the total “market value loss was $20.09 billion, about 15% more than the $17.37 billion direct impact to VW” [24]. These suppliers relied on Volkswagen to buy their materials and were directly impacted by this scandal.

Shareholders of Volkswagen

The first week after the scandal broke, the share price dropped “32%, which translated into a shareholder value loss of about $17 billion[24]. Shareholders invested in Volkswagen for their brand; they trusted them, and instead, they lost their investments and were stuck with dealing with the aftermath to try and salvage their investments.

Other Car Manufacturers

This scandal also created a ripple effect on other car manufacturers, such as BMW and Mercedes[20]. Even though these firms weren't directly involved in this scandal, their revenues still took a hit, and their reputations faltered[20].

Distribution of estimated actual excess Volkswagen light duty diesel, summed through 2008-2015

Broader Stakeholders in the Community

There are also the stakeholders in the broader community. Even though they were not directly a part of the scandal, they will be dealing with unwanted negative externalities directly caused by the extra emissions released into the environment[25][26].

Research by MIT Scientists used vehicle sales data and emission estimations to estimate the average vehicle travel per year for the sales period (2008-2015) to estimate the social cost of this scandal[25].

The research revealed that there is “a social cost of ∼$450m over the sales period” due to this scandal[25][26]. They also found that due to the extra emissions in the environment that there will be 59 early deaths in the United States and 1,200 early deaths in Europe [25][26].

This can impact these stakeholders for the rest of their lives and lower their quality of life[25][26]. This was not a scandal that solely affected the monetary aspects of stakeholders but directly impacted the population's health.

There is also speculation on the non-fatal health impacts such as asthma, bronchitis, a potential 45,000 disability-adjusted life years and a value of life[27][28].

Current Status and Lawsuits

Legal Repercussions for Volkswagen

United States

Environmental Protection Agency Violations
  • On September 18, 2015, the Environmental Protection Agency issued a Notice of Violation against Volkswagen Group regarding violations of the Clean Air Act[29].
  • The violation reported that the manufactured 2.0-litre diesel engines from 2009 to 2015 Volkswagen, Audi, and Porsche vehicle models allowed emissions that exceeded the Environmental Protection Agency's standards and caused significant pollution due to illegal devices implemented in their emission control systems[30].
  • Shortly after, on November 2, 2015, the Environmental Protection Agency issued a second Notice of Violation against Volkswagen group again regarding violations of the Clean Air Act[29]. Similar to the first Notice of Violation of September 18, 2015, Volkswagen group manufactured engines equipped with devices that "bypass, defeat, or render inoperative elements of the vehicles' emission control system that exists to comply with CAA emission standards" this time, however, in 2014-2016 vehicle models with the 3.0-litre diesel engines[31].

Department of Justice Lawsuit

  • On September 4, 2016, the United States of America Department of Justice, on behalf of the Environmental Protection Agency, filed a lawsuit against Volkswagen Group for the first and second Notice of Violations regarding the Clean Air Act that had been issued on September 18, 2015, and November 2, 2015, respectively[29][32].
  • A first settlement was reached on October 25, 2016, regarding the 2.0-litre diesel engines when the United States District Court for the District of Northern Carolina approved the partial settlement of $14.7 billion[33][34].
  • Of the total $14.7 billion settlement, $10.033 billion was to the eligible owners, and the remaining $4.667 billion was for the environment in which the Volkswagen diesel engines had damaged[33].
  • The second settlement was approved by the United States District Court for the District of Northern Carolina in regards to the remaining 3.0-litre diesel engines for the amount of $1 billion on December 20, 2016[35][36].

On January 11, 2017, Volkswagen pleaded guilty to three criminal felony counts and agreed to pay a criminal penalty for breaching Civil Environmental, Customs, and Financial Violations that amounted to $4.3 billion[37][38].

  • $2.8 billion was to be paid as a part of the criminal penalty for using "defeat devices" while the remaining $1.5 billion was allocated to the civil resolutions[38].
  • On the same day, six Volkswagen executives were charged with conspiracy to defraud the United States, conspiracy to defraud customers, and violations of the Clean Air Act. The six executives included Heinz-Jakob Neusser, Jens Hadler, Richard Dorenkamp, Bernd Gottweis, Oliver Schmidt, and Jürgen Peter[38].

Of those involved in the Volkswagen Emissions Scandal, only nine members of management/engineering would face charges in the United States of America[39][40]

  • On August 25, 2017, James Liang was sentenced to 40 months in prison and forfeited a $200,000 fine for his role as an engineer during the scandal[39].
  • Soon after on December 6, 2017, Oliver Schmidt was sentenced to seven years in prison for his role as an executive at Volkswagen AG[40].
  • Martin Winterkorn was charged as the Volkswagen AG CEO along with six other Volkswagen AG executives on May 3, 2018, all of which remained in Germany and were not able to be extradited to the United States to see a courtroom[41].

Canada

Environment Canada
  • On September 22, 2015, Environment Canada opened an investigation on Volkswagen regarding approximately 100,000 Audi and Volkswagen four-cylinder diesel cars of the model years 2009-2015 sold in Canada[42].
  • Environment Canada announced they launched this investigation to be aligned with the United States of America and the Environmental Protection Agency, who also noticed issues of violation to Volkswagen on September 18, 2015[42].
  • Environment Canada's alignment with the Environmental Protection Agency is aiming to work together on their emission standards to "ensure our common environmental outcomes are achieved" [42].

Ontario Superior Court

  • Volkswagen Canada Group Inc. approved a deal working with the Ontario Superior Court on December 19, 2016, to compensate eligible customers of around 105,000 with amounts varying from $5,100 and $8,000[43].

Superior Court of Québec

  • The Superior Court of Québec approved a similar deal following the exact details with Volkswagen Canada Group Inc. to provide compensation for eligible customers[43].
  • The Ontario and Quebec courts approved the class action settlement on April 1, 2017, that required Volkswagen Canada Group Inc. to compensate customers who had purchased or leased an eligible vehicle in Canada[44].
  • On January 22, 2020, Volkswagen pleaded guilty to charges invoked by the Canadian Government that resulted in Volkswagen paying a fine of $196.5 million[45][46]. Volkswagen had admitted to importing 128,000 Volkswagen and Audi vehicles and an additional 2,000 Porsche vehicles that had all violated the environmental emission standards[47].

Germany

  • Volkswagen was imposed with a $1.2 billion fine for altering diesel engines with software and then selling millions of vehicles worldwide with these altered engines[48]. This fine was imposed by German Authorities on June 13, 2018, after Volkswagen publicly admitted to the scandal back in 2015[48][49].
  • German prosecutors would also charge former Volkswagen CEO Martin Winterkorn and Audi CEO Rupert Stadler for fraud as two key contributors to the Volkswagen Emission Scandal[50][51].

Legal Repercussion for Key Players

Martin Winterkorn

Oliver Schmidt poses for a booking photo after being arrested by Broward Sheriff's Office.

In the United States of America, Martin Winterkorn was charged with three counts of wire fraud and faces a $250,000 fine and a five year sentence and another charge of one count of conspiracy facing a $25,000 fine and up to 20 years in prison[41].

Since Martin Winterkorn would elect to stay in Germany and would not receive extradition from the German Government, he would never see a United States courtroom or prison[41].

Martin Winterkorn was also charged in Germany on the count of aggregate fraud on April 15, 2019, and would ultimately be sentenced to seven years in prison and face fines totalling to $400,000[50][52].

James Liang

James Liang was sentenced to 40 months in prison and ordered to pay $200,000 for his role as a Volkswagen engineer on August 25, 2017, after pleading guilty to misleading regulators earlier in 2017[39].

Oliver Schmidt

On January 9, 2017, Oliver Schmidt was arrested in Miami, Florida, on conspiracy to defraud the United States[53]. Later on December 6, 2017, Schmidt was sentenced to seven years in prison after pleading guilty to two charges of conspiracy to defraud the United States to commit wire fraud and violation of the Clean Air Act[40].

Rupert Stadler

In September 2020, Rupert Stadler appeared in court in Munich, Germany, after being arrested on June 18, 2018. He faced fraud charges from the German Government as an Audi executive who knowingly sold vehicles that did not meet the proper environmental emission regulations[54][55].

Post Scandal Effects

Volkswagen in 2022

Since the scandal, Volkswagen has worked on rebranding its corporate identity and attempting to regain the public's trust; however, even five years after this scandal, they are not back to its pre-scandal reputation or valuation[19]. Volkswagen has claimed that this scandal involved only a few employees and hoped that by firing these employees, the scandal would be over and nothing like this would happen again[19]. But there are still lots of doubts about the truth behind this statement[19].

Volkswagen has committed to a "speak up" culture that makes it easier for employees to report wrongdoing, but its board has largely remained the same[9]. To this day, the voting rights are still not balanced, and many of the same board members who were serving during the emissions scandal are still on the board[9].

However, despite the large-scale scandal, Volkswagen is still doing well and is still one of the top car manufacturers in the world[19].

Commitment to Sustainability

  • On its sustainability page, Volkswagen states its intentions of becoming an environmental role model by providing mobility to everyone while also minimizing its environmental impact[56].
  • The company has decided to move away from diesel vehicles in favour of electric cars instead[57].
  • Furthermore, the company has announced that they want to launch one of the most expensive electric vehicle transitions in the market[57].

Where Are the Key Players Now

Martin Winterkorn

  • In June 2021, Martin Winterkorn agreed to pay roughly $14 million to Volkswagen after an inquiry revealed that the former CEO failed to respond appropriately to warnings that the business was utilizing unlawful diesel engine technology[58].
  • In September 2021, Winterkorn and three other former Volkswagen employees had a trial in Germany; however, Winterkorn was unable to attend due to a recent operation[59]. Winterkorn's trial date has yet to be determined[59].
  • Martin Winterkorn is currently listed as a wanted fugitive by the United States Government and is classified as an Environmental Protection Agency Fugitive[60].

James Liang

  • In November 2019, Liang was transferred to a German prison[61].
  • In Germany, he was paroled after serving half of a sentence can be granted to first-time offenders who have shown good behaviour and are unlikely to commit crimes again[62]. A month after his transfer, Liang was granted an early release[61]. His remaining sentence was suspended after serving two-thirds of his sentence[61].

Oliver Schmidt

  • Schmidt was allowed to return to Germany in November 2020 to complete the remainder of his sentence[62].
  • In January 2021, after serving half his sentence, Schmidt was released on parole[62].

Rupert Stadler

  • Stadler's trial has not yet concluded as it is expected to later in 2022[54].
  • He is currently a freelance consultant in the Greater Munich Metropolitan Area[63].

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