Of course Winterkorn knew! DOJ’s latest Volkswagen indictment finally proves what we had suspected all along. Volkswagen’s diesel fraud went all the way to the top.
Rogue employees would not go to such great lengths or perpetuate lies for so long, under tremendous pressure. It had to be sanctioned at the highest levels. What follows is the story of how the first series of lies began, followed by a second, then a third involving an increasing cast of characters all acting to conceal that first lie – while under Winterkorn’s shadow.
On May 3, the US Department of Justice (DOJ) indicted Winterkorn and five other senior executives of fraud and violating the Clean Air Act. Currently two Volkswagen engineers sit in US jails – Oliver Schmidt who was sentenced to 7 years and Robert Liang with 40 months.
They said they’d been following instructions. The big question was: whose instructions and how high did this go?
Et tu Winterkorn?
Winterkorn told the German Parliament in January 2017 that he did not know about the cheat device and only found out in September 2015, the time Volkswagen publicly admitted the fraud. For a CEO who knew micro details, even carrying around a micrometer so that he could measure parts to a hundredth of a millimetre, this was unbelievable. But prosecutors need evidence. DOJ and the German authorities worked hard to find it.
Coincidentally, DOJ issued the Yates memo a week before Volkswagen’s public admission. The memo announced DOJ’s intent to hold individuals liable for wrongful acts committed within corporations. Fining companies millions didn’t seem to deter fraud and corruption.
There was an outcry after HSBC was fined $1.9 billion in enabling money laundering of Mexican drug money as not a single person was charged.
Who suffers? The shareholders. This includes you and me, through our pension funds. Some senior executives lose handsome bonuses. But they still have their life, and their freedom.
Why Do Companies Cheat?
When a company feels pressured to perform to analysts’ short term outlook, its people might take shortcuts. The only one that bucks the trend is possibly Telsa.
I think that if people are concerned about volatility, they should definitely not buy our stock. I’m not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go.
Elon Musk, his infamous performance during Tesla’s Q1 2018 Earnings Call
But most CEO’s don’t feel as secure or as brash as Elon Musk. Fail to deliver and they will lose their jobs. Tesco’s former CEO Philip Clarke, worried about falling market share, promised an impossible £2.8 billion 2014 target causing the finance team to “cook the books”.
Winterkorn and his predecessor Ferdinand Piech, wanted Volkswagen to take over the world.
Volkswagen would be the number one car manufacturer by 2018. Despite Dieselgate, they have succeeded.
Volkswagen needed to capture the US market and this meant selling their popular diesel cars there. No one else had succeeded in the US with diesel. The car had to be affordable, have plenty of boot space and be fuel efficient. Then there was those pesky California air regulations with lower NOx thresholds than in Europe.
How difficult would it be? Just throw it to the clever engine designers?
Except the engine designers couldn’t do it, not without sacrificing boot space or the other parameters. This would hurt car sales.
We don’t exactly know who was the bright spark who thought out of the box and suggested designing the software to differentiate test and road conditions. My analytical left brain applauds his (or her) genius – and then I step back. Wait, this is so clearly wrong.
Several VW engineers said the same thing.
Engineers Speak Up
DOJ’s indictment papers reveal that there were some in Volkswagen who objected but were overridden.
A supervisor within Brand Engine Development authorised VW engineers to use the defeat device, “despite concerns expressed by certain VW AG employees about the propriety of designing and activating the defeat device software. In or about the fall of 2006, lower level VW AG engineers, with the support of their supervisors raised objections to the propriety of the defeat device, and elevated the issue to Supervisor B [a supervisor in charge of the VW Brand Engine Development department]. During a meeting that occurred in or about November 2006, VW AG employees briefed Supervisor B on the purpose and design of the defeat device. During the meeting, Supervisor B decided that VW should continue with production of the US’07 project with the defeat device, and instructed those in attendance, in sum and substance, not to get caught.” See para 36 of the Statement of Facts appended to the Plea Agreement dated January 11, 2017
And again, “Those disagreements over the direction of the project were expressly articulated during a contentious meeting on or about October 5, 2007.” Yet VW Brand Development head, Neusser authorised the project.
This was not a corporate decision, from my point of view, and to my best knowledge today, the corporation in no board meeting, or no supervisor report meeting had authorized this…. This was a couple of software engineers who put this in for whatever reasons
Michael Horn, then VW America CEO tells Congress on October 8, 2015
DOJ’s series of indictment and complaint papers set out the story clearly showing how the cheat device was planned, improved upon and covered up, over and over again. If you ever wanted a case study on organisational fraud, this is it.
The First Set of Lies
Every year, and for each new model from 2009 to 2015, Volkswagen certified to the EPA and the California Air Resources Board (CARB) that the cars met US emission standards.
The Second Set of Lies (to cover the First Set of Lies)
Then the problems started. The Gen 2 models had difficulty discerning test and road conditions, mistaking road for test conditions. Prolonged driving under test conditions, caused stress to the exhaust system. Volkswagen did a massive recall, explaining that it needed to do software updates to improve the car. What it actually did was fix the software to detect steering wheel movements. The wheel did not move in tests, only on the road. Customers got their cars back, software fixed and higher NOx output.
Brilliant. Another fraud to cover up the initial fraud.
Nesseur and Quality Management and Product Safety supervisor, Gottweis, instructed engineers to destroy the documents used to illustrate the operation of the cheating software. The engineers were concerned about the steering wheel recognition function but were overridden by Neusser.
Discovery: It Should be Decided if We Are Honest
The most dramatic series of lies happened with the prospect of discovery.
John Germany of International Council on Clean Transportation (ICCT) revealed in Alex Gibney’s documentary, Hard NOx how he came to commission the West Virginia University to test Volkswagen car emissions. He was trying to understand how US diesel cars were environmentally cleaner than their European counterparts.
The researchers discovered that two of the three vehicles tested on the road exceeded CARB’s permissible emissions threshold by 40 times.
Unsure how to make this public without being sued by Volkswagen, ICCT presented at a small San Diego conference stating data of “Company A, B and C” without revealing Volkswagen. VW executives were present. They had written privately to VW with their findings. This was spring 2014.
The message was received loud and clear.
Oliver Schmidt received the study in early April and wrote to a colleague, “It should first be decided whether we are honest. If we are not honest, everything stays as it is. ICCT has stupidly just published measurements of [North American Region] diesel off-cycle, not good.”
Oliver Schmidt forwarded Gottweis the ICCT presentation and an e-mail where a VW employee said “[s]ome presenters indicated that they suspected charging, where the vehicle recognizes it is an [sic] a dyno and runs different calibration that [sic] what it runs in actual driving. We will have to be careful with this going forward.” Schmidt added that within VW America, “the study is known only to EEO [VW’s Engineering and Environmental Office] and we want to keep it that way for the time being.” Schmidt was general manager of the EEO in America.
Panic ensued back in Wolfsburg.
The Brand Engine Development Department formed a task force to respond to CARB.
On April 28, 2014, the Task Force briefed Gottweis on ICCT’s study, how VW was cheating and the consequences which included recalling 500,000 cars in the US. Gottweis said he would discuss this with Winterkorn immediately.
It’s not clear when this discussion took place but on May 23, 2014, Winterkorn was given Gottweis’ memo on the ICCT study.
Something had to be done. Prove that the emissions did not have adverse health effects.
Enter the Monkeys
The world was horrified earlier this year when Alex Gibney’s documentary showed monkeys being used to test the diesel emissions from a bright red VW Beetle. I cried watching it.
Der Spiegel relates the story of how the tests were devised:
“We have finished our discussions with the company lawyers,” Spallek [former VW manager] wrote in an email dating June 14, 2013. The lawyers had given the green light for the study to be carried out, but with one restriction: Non-human primates were to be used instead of human volunteers.”
The tests took place in October 2014. Robert Liang delivered the car and observed the tests. He brought a transmission device to send real time data to VW’s California research centre. Liang also ensured that the vehicle was operating under the test conditions. VW’s shinny Beetle was compared against an old Ford truck. Emissions from the exhaust filled a glass cages with monkeys watching TV. The Ford monkeys were fine. The Beetle monkeys showed significant inflammatory reaction. This wasn’t what VW wanted.
Ultimately VW refused to use the results saying that the monkeys were females which menstruate, therefore rendering the results unusable.
The Third Set of Lies (to Cover the First and Second Set) – Creating Stories for CARB
Dr Alberto Ayala, CARB deputy CEO described the intense 16 months interacting with VW in Hard NOx.
CARB would conduct tests, send the results to VW. VW would respond, carefully avoiding the truth, and CARB would test again. Repeat the cycle several times. Dr Ayala explained that VW would say CARB’s instruments were not well calibrated, they had graduate students running around who got it wrong. At no point did CARB suspect the truth.
Meanwhile on VW’s side, running out of ideas, e-mails were flying.
April 2015: “we ‘only just need a plausible explanation’ as to why the emissions are still high!!!”
May 2015: “We need a story for the situation!”
June 2015: “We must be sure to prevent the authority from testing the Gen 1!….If the Gen 1 goes onto the roller at the CARB, then we’ll have nothing more to laugh about!!!!!”
Early July 2015: “the key word ‘creativity would be helpful here.”
End July 2015: “[C]ARB is still waiting for Answers… We still have no good explanations!!!!!”
Translated from German by DOJ in Robert Liang’s Indictment
Then there were the meetings. By this stage, CARB’s questions were getting more specific and VW Legal got involved.
On July 27, 2015, Schmidt and a colleague gave a powerpoint presentation to Winterkorn and senior officials. They explained how VW deceived, what had and hadn’t been disclosed to the authorities, the consequences of being caught and a recommendation of the next steps, being partial disclosure to CARB (but not of the device). Winterkorn approved the recommendation. Management instructed Schmidt to meet CARB.
Schmidt met CARB, specifically Ayala, on August 5 and 19.
On August 18, Schmidt was given a carefully worded script as to what he could say. This script was approved by Legal. Later, when he was sentenced, Schmidt said in a letter to Judge Sean Cox:
I must say that I feel misused by my own company in the diesel scandal or ‘Dieselgate’…. A script, or talking points, I was directed to follow for that meeting was approved by management level supervisors at VW, including a high-ranking in-house lawyer. Regrettably, I agreed to follow it.
At the August 19 meeting Schmidt obediently followed management instructions and stuck to the script. It was EEO head, Stuart Johnson who broke ranks and privately informed Ayala of the defeat device.
Ayala understandably hit the roof. Johnson in his deposition on August 8, 2017, recalls Ayala’s words, “you played us, you tried to put a pillow over our head. You wasted a lot of our time and money. We will come after you hard on this.”
What VW’s Lawyers Did Next, Hide the Evidence
This was the time for immediate damage control. The authorities now knew. The instinctive reaction for a lawyer is to cast a protective shield, find out what damning evidence sits within and yell the magic word Privilege.
DOJ hints in the Volkswagen Plea Agreement at an interesting dynamic between the legal departments in Germany and the US. The US was clear that they would have to issue a “document hold”, knowing that the authorities would demand disclosure and there should be no deletion or destruction of any documents.
In Germany, a person named by DOJ as “Attorney A” appeared to issue instructions of a different nature. On August 26, VW’s US legal team sent Attorney A a text of the legal hold for documents in the Wolfsburg office “.” saying they would issue the notice. At meetings on August 27 and 31, Attorney A informed engineers in Germany that a hold was imminent and that they should “check” their documents. The engineers interpreted this as instructions to delete documents. They did. The hold notice was issued on September 1.
In September, as new documents were being prepared which contained evidence harmful to VW, Attorney A advised that new data be kept on USB drives with only final necessary versions to be saved on VW’s system.
“Even employees who did not attend these meetings, or meet with Attorney A personally, became aware that there had been a recommendation from a VW AG [Germany] attorney to delete documents related to U.S. emissions issues. Within VW AG and Audi AG, thousands of documents were deleted by approximately 40 VW AG and Audi AG employees.”
Para 81, DOJ-VW Plea Agreement
Attorney A told authorities that “check” meant keep, not delete. He believed his instructions were misunderstood by the engineers. He hasn’t been charged.
Fortunately the deleted documents could be recovered for internal investigation.
The internal investigation was carried out by law firm Jones Day who interviewed hundreds of employees. VW chose not to publicly share their report, claiming legal privilege. German authorities raided Jones Day but prosecutors were blocked by the German court from using any information from Jones Day. This could be why the German authorities are slower in charging any VW executive. This is a real shame. Whilst the US has indicted WInterkorn and five other senior executives, there is no extradition treaty with Germany. Unless Germany itself presses charges, these men will stay free, within Germany, while their underlings – Liang and Schmidt remain incarcerated.
Forget Compliance When the Big Boss is Complicit
I salute compliance professionals around the world. Putting in policies, whistleblower hotlines and training helps you tick boxes and makes you look good when enforcement agencies knock on your door.
But all this fails when the very top guy is complicit.
Winterkorn’s immediate circle: Nesseur, Dorenkamp, Gottweis, etc. were very clear on perpetuating the fraud. Despite objections by some of the engineers, they persisted.
If Winterkorn was known to be someone with zero tolerance to cheating, the whistle would have been blown early on. Instead, employees may have suspected he was aware and therefore sanctioned the fraud.
The legal department too, seemed intent on protecting the inner circle rather than investigating the truth.
What could employees do, other than follow orders?
Volkswagen is unique among corporate scandals in that there was no external whistleblower. Had ICCT not commissioned the tests, we may still be breathing in NOx from “clean diesel” cars.
Winterkorn was an authoritarian leader who controlled not just 600,000 employees but also the board. If employees knew he sanctioned the fraud, there was very little they could do. Losing their job would have been a scary prospect for employees who had worked and lived their entire lives in Wolfsburg, a town where VW was the major employer. VW owned Audi and Porsche – could they even work elsewhere in the German car industry?
Employees who felt compelled to be part of the fraud would have asked themselves:
- Will I lose my job: Quite Likely
- Will I find another job where my children go to school: No
- Will I find another job in the German car industry: Unsure, people in the industry know each other.
- Will I get caught: Well the top guys are involved, so no (this is a false belief)
- Is it wrong to violate US law: the same cars meet German law so what’s the problem?
Conclusion: keep quiet and carry on.
Volkswagen is hardly alone with this culture. There are organisations where wrongdoing starts at the very top. Companies ruled by fear and a strong blame culture. Hard working employees keep their heads down. They watch as their more vocal colleagues get harassed and eventually pushed out.
There is no accidental ICCT hero.
Forget compliance. You need to change the leaders.
This article first appeared in the Anti-Corruption Digest. It was pieced together based on DOJ papers, Alex Gibney’s brilliant documentary Hard NOx on Netflix and numerous news reports including Germany’s Der Spiegel.
Animah Kosai, a former lawyer in the oil and gas industry formed Speak Up to support organisations in enabling their employees to speak up on wrongdoing. She also writes and speaks on corporate whistleblowing, harassment and sexual harassment. See www.speakupatwork.com. Follow Animah on LinkedIn, Twitter and Facebook.
Feature image of Martin Winterkorn courtesy of Wikipedia