The VW Scandal

This article was republished with permission from Tom Fox’s FCPA Compliance and Ethics Blog.

One of the areas where my thinking has evolved in the compliance arena is around the area of reputational damage. Of course, commentators, such as Andrea Bonime-Blanc, have written and spoken about preventing damage to a corporation’s reputation as the key component of a best practices compliance program; I had focused on legal and regulatory aspects of compliance. However, those views are changing as we continue to see the world’s largest compliance scandal (to date) play out, that being the Volkswagen (VW) emissions-testing scandal.

In an article in the New York Times (NYT) entitled, “VW’s Crisis Strategy: Forward, Reverse, U-Turn,” Danny Hakim explored the continuing series of corporate missteps the company has made after the public scandal broke in early September 2015. As a precursor to these guffaws, it has now been revealed that departed VW Chief Executive Officer (CEO) Martin Winkelhorn was told about the device used to defraud regulators and diesel testing systems in May 2014, some 16 months before the Environmental Protection Agency (EPA) went public with its findings that VW had intentionally installed this device to allow the company’s autos to meet U.S. and EU regulatory standards.

The latest FUBAR came when the current CEO, Matthias Müller, who apparently confused himself with a U.S. presidential candidate, told NPR while visiting the U.S. for the Detroit Auto Show that VW did not lie in the emissions-testing scandal. I guess he has not had time to read any of the public announcements VW has made, including testimony by its Head of U.S. to Congress that the company not only lied, but also perpetrated a worldwide fraud by installing the device. The NYT reported, “The outcry forced Mr. Müller to call NPR and revise his statement.”

Anyone who has been following the VW emissions-testing scandal knows this is not the first misstep by either leader of the automaker. The prior CEO, Winkelhorn, claimed he knew nothing about the device and that it was the work of a few rogue employees. Yet it turned out that Winkelhorn had brought a trusted-lieutenant out of retirement to look at the issue back in 2014 and that person had reported the device and attendant corporate misrepresentations in a memo to Winkelhorn. Further, if anyone really believed that a top-down hierarchical leadership would allow a few engineers to design, install and implement a software system over nearly 10 years, that fantasy has also been disabused.

Yet the above mistakes are only a few made by VW. For some reason, VW has admitted it violated the law in the U.S. and has paid some minor restitution in the form of credits for purchases at VW dealerships in the U.S. However, in EU countries, VW has refused to admit it violated any laws and has not even offered any restitution. This is in the face of recalling those cars in Europe for retrofitting. You might think that since VW sold 500,000 cars in the U.S. versus millions in Europe, the company would want to rebuild its reputation with its largest customer base. On the other hand, maybe not. As the NYT dryly noted, “Treating customers differently in Europe and the United States is asking for trouble.”

VW is not doing itself any favors on the legal front, either. Although it has hired the U.S. law firm Jones Day to lead its internal investigation, it has “argued that German privacy laws prevent it from fully cooperating with American investigators.” Indeed, “On the other side of the world, prosecutors in South Korea are threatening to bring criminal charges against executives there.” In the face of these regulatory inquiries, the head of VW’s Porsche division has said, he is “hoping to reinstate Wolfgang Hatz, the suspended engineering chief who is seen as a central figure in the scandal.” I guess good help is hard to find these days.

There are two things that make the VW scandal so important to the compliance world going forward. The first is its worldwide scale. At this point, only the Petrobras scandal is truly as worldwide in scope. Even the most massive Foreign Corrupt Practices Act scandals are almost always confined to one or at most a few countries. Yet the VW scandal is a “crisis that traverses the globe.” The NYT quoted Irving Schenkler, a professor and crisis management expert at New York University as saying, “It’s unprecedented in terms of the cross-national scope of it, the degree of the problems. There are so many different fronts.”

The second point is that it cuts across companies as well. This is one of the very few scandals that has negatively impacted other companies. This is not the situation of a cartel or some other collusion of companies. All the major German auto manufacturers were compelled to defend their emissions-testing protocols.

All of this means a Chief Compliance Officer (CCO) or compliance professional will need to be ready to respond on a wide variety of fronts in a corruption scandal in the future. Last week, the federal judge overseeing the EPA suit against the company set a deadline of March 24 for the company to deliver a plan to remediate the emissions protocol issue. The function of any compliance program is to prevent, detect and remediate any issue going forward. While each of these three steps act in concert, there is a reason they are separately designated. Even if your programs has failed in steps one and two, you can and should be ready to move into step three – remediate. The article ended by noting that managing the VW crisis has been a step-by-step process — one where the company learned by actually doing. Apparently telling the truth has not percolated up to the top as yet. But it should. And call Andrea Bonime-Blanc.

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