Volkswagen emissions scandal and vehicle type approval Contents

2The Volkswagen Group emissions scandal

The scandal

12.On 18 September 2015 the US Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to Volkswagen AG, Audi AG, and Volkswagen Group of America that alleged Volkswagen and Audi diesel cars from model years 2009–2015 included “software that circumvents EPA emissions standards for certain air pollutants” (so called ‘defeat devices’).8 VW admitted on 22 September that the relevant engine software affected 11 million vehicles worldwide, amounting to corporate deception on a global scale.9 Approximately 8.5 million of those vehicles were located in Europe, including nearly 1.2 million registered in the UK. Around 500,000 affected vehicles were located in the United States.10

13.VW traced the origin of the scandal back to a decision made in 2005 to launch a large-scale promotion of diesel vehicles in the US. The company found that it was not able to meet the US’s NOx limits, which were stricter than those in the EU, within the required timeframe or budget. VW alleged that a small group of employees decided to cheat by installing software that adjusted NOx levels according to whether vehicles were on the road or being tested.11 Bosch, a components manufacturer, provided parts for the VW models named in the reports. Bosch stressed that the manufacturer was responsible for how components were calibrated and integrated into vehicle systems.12

14.The International Council on Clean Transportation (ICCT) performed real-world emissions tests on a VW Passat, a VW Jetta and a BMW X5 in collaboration with West Virginia University during 2013 and 2014. The researchers were not looking for deception; they was testing cars that they believed conformed to strict US emissions standards to demonstrate that cleaner cars were viable in the EU. The ICCT found, contrary to expectations, that real-world nitrogen oxide (NOx) emissions from the Jetta exceeded the US standard by 15 to 35 times in various real-world driving conditions. The Passat’s real-world NOx emissions were 5 to 20 times the standard.13 When the ICCT ran further tests on a dynamometer in line with official emissions tests, the cars passed.

15.It took considerable commercial pressure from US regulators before VW admitted to cheating emissions tests. Regulators were considering whether to certify VW’s 2016 models for sale at the same time as the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) were considering the ICCT’s findings. The regulators said 2016 models would not be approved unless VW provided a satisfactory explanation for its cars’ real-world emissions. VW’s failure to do so led the regulators to indicate that 2016 models would not be certified. Only then, on 3 September 2015, did VW admit that it had installed a defeat device in the cars under investigation.14 The news reached the wider world on 18 September when the EPA, not VW, disclosed it.

Fixing affected cars

16.VW said that it would recall affected cars to correct their emissions characteristics. In Europe the fix would be:

Matthias Müller, Chief Executive, VW, was reported as saying that the recall would be concluded by the end of 2016.16 1.2 and 2.0-litre engines were said to require a software upgrade only. 1.6-litre engines also required the installation of a piece of mesh to regulate air flow (a ‘flow transformer’).17 The technical solutions required approval from the appropriate approval authorities, including the VCA for certain vehicles.18

17.VW’s schedule for fixing cars was severely delayed. On 25 April 2016 Robert Goodwill MP, Minister of State, Department for Transport, said that VW had failed to fix any vehicles in the UK19 and the delay was the result of the German Government’s approval authority’s (the KBA’s) dissatisfaction with VW’s technical solution. Testing had shown that the technical solution had resulted in an increase in CO2 emissions.20 VW told the Department for Transport (DfT) that it did not expect the delay in fixing vehicles to affect the overall timescale for the technical measures to be completed.21

Jones Day investigation

18.VW hired Jones Day, a US law firm, to conduct an internal investigation into the origins of the emissions scandal and to identify those responsible. Deloitte, an audit firm, was appointed to provide operational support.22 VW UK described the Jones Day investigation as “independent” and “external”.23 Paul Willis said that he was “not sure that the entire report will be given out where there is competitively sensitive information” but also said he found it “implausible that if you employed independent lawyers you would edit the report” before publication.24 We noted that Jones Day advertised its services for conducting internal investigations on behalf of companies as including advice on “whether and how to voluntarily disclose criminal conduct to the government”.25

19.VW committed to provide an update on the investigation by the end of April 2016 but reversed its decision on the basis that publishing results at that time “would present unacceptable risks” and might jeopardise negotiations with US authorities including the Department of Justice. VW was concerned that publishing interim results might cause those employees not yet interviewed as part of the investigation to align their responses to the interim report’s conclusions.26 VW’s concern for the integrity of the investigative process did not affect its decision to say the investigation had revealed the scandal was the result of “misconduct and shortcomings of individual employees; weaknesses in some processes; and a mindset in some areas of the Company that tolerated breaches of rules” in December 201527 nor to announce that the investigation had not found evidence of “serious and manifest breaches of duty on the part of any serving or former members of the Board of Management” in May 2016.28 We believe that was inappropriate.

Defeat device

20.VW was accused of cheating emissions tests by using a sophisticated software algorithm known as a ‘defeat device’. This detects whether a vehicle is being driven normally or is undergoing a test in a laboratory, and in the latter case alters the engine characteristics to produce a lower level of emissions than usual. Authorities knew of the potential for manufacturers to use defeat devices for many years and US authorities have a long history of prosecuting motor manufacturers for doing so.29 The United Nations Economic Commission for Europe (which sets worldwide standards for vehicles), the EU’s Regulatory Framework and the US EPA all have similar definitions of what constitutes a defeat device and similar provisions for prohibiting their use.30

Did VW break the law?

21.VW admitted that it installed an illegal defeat device in the US but disputed that similar software constituted an illegal defeat device in the EU.31 The ICCT said that was noteworthy because “the language defining and prohibiting defeat devices in the U.S. and EU regulations is nearly identical; the differences are minute and immaterial.”32 The German approval authority, the KBA, disagreed with VW and said that VW’s software fitted the legal definition of a defeat device.33

22.When Paul Willis, Managing Director, VW UK, first appeared before us he issued an apology for VW’s conduct, “First of all, I would like to apologise sincerely and unreservedly for the fact that Volkswagen has significantly let down its customers and the wider public over the findings of irregularities in some of the diesel-powered vehicles we produce.”34 In a subsequent evidence session Paul Willis robustly denied that VW had done anything wrong under EU regulations and when pressed to explain why he had previously apologised, he described VW’s conduct as only “inappropriate”.35

23.It is not credible for Volkswagen Group to apologise for its conduct only to then deny that it had done anything wrong. Volkswagen deceived both regulators and their own customers on a global scale and it has shown a cynical disregard for emissions limits which exist to protect human health from dangerous pollutants. VW’s conduct has severely undermined confidence in vehicle standards that are relied upon by consumers and it has not only brought its own integrity into disrepute but also that of the auto sector.

24.The VCA confirmed through its own testing that the Škoda vehicles that it type approved contained defeat device software.36 We welcome the work the VCA has done to establish that fact but regret that not more work was done to analyse the extent that the software contributed to meeting emissions limits and obtaining type approval. The DfT said that under the EU Regulation “if the defeat device operates during the official emissions test (and the vehicle is still able to meet the required emissions limits) then this can be deemed acceptable.”37 VW told us that “the software did amend the NOx characteristics in testing. The vehicles did meet [Euro 5] standards, so it clearly contributed to meeting the [Euro 5] standards in testing.”38 VW would not confirm whether the vehicles would have passed emissions tests without the defeat device software stating that it was not possible to confirm that for technical reasons, “If you simply deleted this particular software programme (without amending anything else), the vehicle would not function.”39

25.We do not believe it is credible for VW to say it is unaware of the exact contribution the defeat device software made to passing type-approval tests. The question of its contribution lies at the heart of the question on whether VW broke the law. When we asked Paul Higgs, Interim Chief Executive, VCA, whether any effort had been made to ascertain whether type approval had been contingent on the defeat device software he replied “We would have to ask Škoda to supply a vehicle without the defeat device but not fix it, so that we can retest it to see how bad it would have been, or if it would have passed [ … ] It seems an odd thing to ask them, because the idea is that they are going to fix the actual device they had fitted by removing it and then recalibrating the engine.”40 While there might be technical difficulties for quantifying the contribution the defeat device software made to meeting emissions limits, it is concerning that the VCA has not made any efforts to do so. Richard Lloyd, Executive Director, Which? said, “We would need to see more data on the actual impact of the defeat device prior to the modification. All we have had are assertions from VW. We have had none of this from any independent source.”41

26.The question of whether VW broke the law in the EU needs to be answered urgently. Throughout our inquiry we sought to identify who was responsible for resolving that dispute. We did not receive a definitive answer. The Secretary of State was initially relaxed about describing VW’s software in the terms of an “illegal” defeat device42 but in a later evidence session Robert Goodwill MP, Minister of State, said the software was “outside the regulation” but was at pains not to define it as illegal. The Minister said the question of legality was a matter for the courts but he was not able to tell us for certain which authority would be responsible for initiating court proceedings. The Minister said, “to tell you whether that is illegal it would need to come before the courts, and it may well be the European Commission that takes that action”43 but the Commission said that it:

does not have enough evidence on the legality or illegality of the VW emission control software. All such information lies with the relevant Type-approval authorities, who have the authority and obligation to investigate any such cases and act accordingly. The Commission will carefully analyse the results of the national investigations before deciding on possible next steps.44

Under the current legislation the power to impose sanctions for non-compliance rests with member states.45

27.The Secretary of State said that in the UK, VW could face action from the Serious Fraud Office (SFO), the Competition and Markets Authority (CMA) and himself under the Road Vehicles (Approval) Regulations 2009. In practice little action has been taken.

Serious Fraud Office & the Competition and Markets Authority

28.In the UK the CMA and the SFO have considered investigating VW which could be prosecuted on the following grounds:

The Competition and Markets Authority and local weights and measures authorities (Trading Standards) (or in Northern Ireland, the Department of Enterprise, Trade and Investment in Northern Ireland (DETINI) can prosecute for prohibited commercial practices under the Consumer Protection from Unfair Trading Regulations 2008, e.g. unfair commercial practices and misleading actions and omissions. The maximum penalty on conviction on indictment is 2 years imprisonment or an unlimited fine or both.

The Serious Fraud Office may prosecute for fraud where a person knowingly makes a false representation or knowingly fails to disclose information that he is under a duty to disclose with the intention of making a gain or causing a loss (Fraud Act 2006). The maximum penalty on conviction on indictment is 10 years imprisonment or an unlimited fine or both.46

UK authorities have taken a softer approach to investigating VW compared to European counterparts. French and German authorities raided VW’s national headquarters to seize evidence for criminal investigations but Paul Willis, Managing Director, VW UK, said he had not received any representations from the CMA or the SFO.47 The CMA said that it had not opened a formal investigation48 but was assessing the allegations and VW’s response. 49 The DfT told us that the CMA were not able to seek compensation for consumers in the VW case.50 The SFO said that it was working with UK and European bodies to assess whether any alleged criminal offence, involving serious or complex fraud, falls within its remit.51 The DfT said, “Prosecuting authorities from 16 Member States (plus Norway, Switzerland and OLAF (European Anti-Fraud office)) are coordinating their investigations through Eurojust.” DfT officials are taking part in those discussions.52

Road Vehicles (Approval) Regulations 2009

29.The Secretary of State for Transport has the power to prosecute manufacturers who obtain type approval in the UK under false pretences. The VCA granted the emissions type approval for Škoda vehicles installed with defeat devices so it is possible that the Secretary of State’s powers are applicable.53 The Secretary of State said:

For VCA approvals, the Secretary of State may prosecute the manufacturer providing he has sufficient evidence that, as a person supplying information or producing a document for obtaining type-approval or any other purpose under the Road Vehicles (Approval) Regulations 2009, the manufacturer knew or was reckless as to it being materially false. The maximum penalty on conviction is an unlimited fine.54

The Minister of State, Robert Goodwill MP, assured us that the use of those powers was under “consideration” by the DfT.55 The Secretary of State needed to “establish that Škoda officials had knowledge of the use of a prohibited defeat device in VW diesel engines and made false statements in that regard when they presented the vehicles to VCA for type approval.” Criminal counsel has been advising the DfT on the evidence base for a successful prosecution and the procedural steps required for such a prosecution since February 2016.56 We noted the Secretary of State’s description of VW’s actions as “appalling” and his view that the company deserved to “suffer very substantial damage as a result”.57

30.It is not credible for VW to say that it does not know the exact contribution that the defeat device made to meeting EU emissions limits. We are concerned by the Department for Transport’s ambivalence towards assessing the legality of Volkswagen’s use of defeat device software despite its condemnation of Volkswagen’s actions to us and in the media. The Department for Transport was too slow to assess the use of its powers under the Road Vehicles (Approval) Regulations 2009 to prosecute Volkswagen for its deception. It took five months before the DfT took even preliminary legal advice on a prosecution. It is deeply concerning that the Department is relying on the European Commission to act even though the Commission does not hold the necessary evidence or have powers to prosecute. We are also concerned that regulators have shown little interest in establishing whether Volkswagen Group has broken any laws. The Vehicle Certification Agency has evidence that defeat devices were installed in vehicles that it type approved but it has not attempted to conduct any tests to prove that type approval was contingent on the use of the defeat device software. The VCA must measure the exact contribution that the software made to meeting Euro 5 emissions standards. That would facilitate investigations and court actions in the UK and across Europe.

Compensation and goodwill payments

31.VW has taken contrasting approaches in providing redress to customers in Europe and the US which has led to anger over the fairness of its response. VW initially said it would give US car owners $500 and a further $500 of credit vouchers. VW subsequently worked with US officials on a deal under which it would buy back affected cars. In Europe VW has ruled out goodwill payments or compensation altogether. Paul Willis, Managing Director, VW UK, said US customers were offered goodwill payments because they “will have to wait considerably longer for the technical measures to be implemented than UK customers” and because VW was concerned that there had been a significant drop in trust in diesel engines amongst US consumers as a result of the scandal.58 VW stated that UK customers had not suffered a financial loss from the scandal or as a result of the fix to their cars; on that basis there was no justification for compensation or goodwill payments.59 The RAC and motoring journalists who monitor the resale value of cars told us it was too soon to know whether the value of affected cars had been reduced as a result of the scandal. 60

32.There would be a further case for compensation if there was any reduction to vehicle performance as a result of VW’s fix. The VCA said it will “ensure that after the fix is applied the vehicles meet all the legal requirements, including emissions, and that other vehicle characteristics are unchanged or improved, including fuel consumption and engine noise”.61 Approval authorities have emphasised the importance of ensuring that fuel economy is not reduced as a result of VW’s fix. Equal consideration should be given to all aspects of vehicle performance, including component reliability and durability which are less easy to measure in laboratories but can prove costly for owners when they are impaired. There were concerns that VW’s technical solution was developed at the lowest possible cost for the purpose of satisfying emissions standards and the maintenance of fuel economy but at the expense of component durability—particularly components that comprise the emissions control system. Engine design requires trade-offs between many factors such as fuel consumption, emissions, reliability, and durability.62 We believe that approval authorities should ensure that owners affected by the VW emissions scandal are not out of pocket as a result of VW’s fix, including from any adverse trade-off between fuel consumption and emissions on one side and component durability on the other.

Sale of Goods Act 1979

33.There is a case for car owners affected by the emissions scandal to be compensated under the Sale of Goods Act 1979.63 A partial refund is a possible option.64 Any refund would be subject to a deduction to reflect the use the owner has already had of the car.65 Owners could recover further damages if it was shown that their cars had depreciated in value as a result of the emissions scandal or if VW’s technical solution resulted in the loss of fuel economy or any other financially quantifiable impairment. Owners who purchased cars under hire-purchase might have been able to terminate contract and recover instalments already paid had action been taken in the immediate aftermath of the emissions scandal. Those who did not take action at that time could still examine the case for damages in the same way as those with a sales contract.

34.The Sale of Goods Act 1979 takes into account “any public statements on the specific characteristics of the goods made about them by the seller, the producer of his representative particularly in advertising and labelling.”66 It is obvious that owners believed their cars complied with the emissions standards under which they were sold. Professor Christian Twigg-Flesner, Professor of Commercial Law, University of Hull, said:

If there were such statements, e.g., in brochures or general advertising, then these would be given a high degree of importance in assessing whether the cars were of satisfactory quality. If actual emissions significantly exceed the advertised values, then this would be a strong indicator that the car is not of satisfactory quality. It seems likely that a court would consider the extent to which advertised and actual values differ. Although there is no clear guidance, it might be assumed that anything beyond a minor discrepancy would be in the consumer’s favour.67

Consumers who bought new vehicles after 1 October 2014 could instead take a separate course of action under the Consumer Protection from Unfair Trading Regulations 2008, which takes account of “results and material features of tests or checks carried out on the product”.68 Under those Regulations it is necessary for it to be shown that the average consumer would have been affected by the misleading information and that correct information about emissions compliance was a significant factor in an individual’s decision to purchase a vehicle.69

35.The fact that emissions could be brought into line with legal emissions limits as a result of VW applying a technical solution is unlikely to have a bearing on whether the cars were of satisfactory quality as defined under the Act. “In consumer cases, in particular, courts have disregarded the possibility of being able to repair matters easily. What matters is the state and condition of the car when delivered.”70 Provisions in the Sale of Goods Act 1979 stipulate that repairs can be provided as a means of compensating owners but must be provided within a reasonable period of time and without significant inconvenience.71 As noted above, the schedule for fixing affected cars is already delayed and approval authorities rejected some proposed fixes on the basis that they have resulted in higher CO2 emissions.

36.Volkswagen’s treatment of customers in Europe compared to its treatment of customers in the US is deeply unfair. Volkswagen said it was justified in providing goodwill payments to US customers, but not European customers, on the grounds that US customers would face delays to fixing their vehicles. The delay to fixing vehicles in Europe is now creating a great deal of uncertainty over whether cars will be fixed, their residual values and their compliance with regulations. We do not accept Volkswagen’s justification of its policy on payments and see nothing to justify their refusal to offer comparable payments to customers in Europe. Volkswagen must provide goodwill payments to European vehicle owners equal to offers that have been made to US vehicle owners. The Sale of Goods Act 1979 might also offer owners some recourse for compensation.

37.We welcome the work that approval authorities have done to ensure that there is no adverse impact on fuel economy and other aspects of vehicle performance. For consumers to have confidence in any technical solution, approval authorities must be mindful that component reliability and durability are not impaired either, as that could lead to high repair costs for owners. The VCA must ensure that owners are not out of pocket in any way as a result of Volkswagen’s technical solution; Volkswagen must meet those costs.

9 VW press notice, 22 September 2015

13 The BMW X5 generally met US NOx limits in real-world conditions. It only exceeded limits during rural uphill operating conditions

19 Vehicle type approval, Q455

24 Volkswagen Group emissions violations, Qq228 & 230

26Status of the investigation in connection with the diesel matter” Volkswagen press release, 22 April 2016

30 Department for Transport, Vehicle Emissions Testing Programme, April 2016, para 2.14

32 ICCT (VTA0023) page 1

34 Volkswagen Group emissions violations, Q2

35 Volkswagen Group emissions violations, Q206

40 Vehicle type approval, Qq414 & 415

41 Vehicle type approval, Q379

42 Volkswagen Group emissions violations, Q87

43 Vehicle type approval, Q495

47 Volkswagen Group emissions violations, Q275

48 The CMA does not always make its investigations public

53 Department for Transport, Vehicle Emissions Testing Programme, April 2016, para 5.5

55 Vehicle type approval, Q466

57 Volkswagen Group emissions violations, Q87

60 Vehicle type approval, Qq43–45

62 Martin Maynard (VTA0016)

63 We heard that the Consumer Rights Act 2015 was unlikely to be of help to affected owners as news of the VW emissions scandal was revealed prior to it coming into force.

64 Professor Christian Twigg-Flesner (VTA0032) page 5

65 Professor Christian Twigg-Flesner (VTA0032) page 5

66 Professor Christian Twigg-Flesner (VTA0032) page 2

67 Professor Christian Twigg-Flesner (VTA0032) page 3

69 Professor Christian Twigg-Flesner (VTA0032) page 5

70 Professor Christian Twigg-Flesner (VTA0032) page 4

71 Professor Christian Twigg-Flesner (VTA0032) page 5

© Parliamentary copyright 2015

12 July 2016