Product environmental regulations increasingly impact the corporate bottom line if they are not managed properly. Volkswagen shareholders discovered the impact of non-compliance with environmental requirements overnight. As often, a Non-Governmental Organization triggered the enforcement action. While the EU may be more active in producing product environmental regulations, the U.S. agencies are much better in enforcement of the environmental rules.
ENFORCEMENT ACTION AGAINST VW
The U.S. Environmental Protection Agency (EPA) issued a Notice of Violation on Friday 18 Sep 2015. The timing of the Notice is carefully chosen in the midst of the Frankfurt Motor Show, one of the biggest events for the auto industry.
“Put simply, these cars contained software that turns off emissions controls when driving normally and turns them on when the car is undergoing an emissions test,” Cynthia Giles, an EPA enforcement officer said. The feature in question, which the EPA calls a "defeat device," masks the true emissions only during testing and therefore when the cars are on the road they emit as much as 40 times the level of pollutants allowed under clean air rules.
EPA expects to compel VW to issue a recall in the future to reduce the emissions impacts of these vehicles. Owners will be notified of that recall once Volkswagen and Audi have developed a remedial plan and EPA has approved the plan. Depending on the involvement of the company and its managers in the design and deployment of the defeat device, they are also exposed to criminal prosecution.
THE COST OF NON COMPLIANCE FOR VW
The Volkswagen share price dropped by almost 20% on Monday as a result of the scandal on cheating on the U.S. air emission rules. The difference in company valuation between Friday close and Monday close is EUR 8,159,233,467. And this is just the beginning of the cost for non compliance with product environmental requirements. Add another potential USD $18 billion in civil penalties (482,000 cars with a maximum civil penalty of USD 37,500/car), the cost of a recall and retrofit of the 482,000 cars, legal proceedings, the negative publicity and the loss of market share as a result of all this.
WHO DETECTED THE FRAUD?
As we have seen in numerous other product compliance scandals, a non-governmental organization detected the problem. The International Council on Clean Transportation (ICCT) conducted research on emissions from diesel engines in 2013-2014, when they detected the discrepancy between Volkswagen’s emissions in testing laboratories and on the road. They brought the issue to the attention of the E.P.A., which conducted further tests on the cars, and ultimately discovered the use of the defeat device software. Note that the research also covered BMW vehicles which met the standard, proving that the technology needed to meet the U.S. motor vehicle air pollution emission standards for diesels is available.
The US Authorities contacted Volkswagen as a result of the research findings in May 2014, which resulted in a voluntary recall in December 2014. The recall attempted to address the issues, but with no impact. The Volkswagen 2014 Corporate Annual Report does not seem to disclose the issue explicitly, which begs the question whether management properly disclosed the potential liabilities to the shareholders.
Mr. John German, U.S. program lead for the ICCT, said that "The huge discrepancy in real-world performance among these vehicles makes it clear that without vigilant enforcement of air pollution laws, companies that comply with the standards will be placed at a competitive disadvantage. If left unchecked that could undermine the whole regulatory framework. That's why the actions by EPA and CARB are so important."
The International Council on Clean Transportation (ICCT) is an independent nonprofit organization founded to provide research and technical and scientific analysis to environmental regulators. It is funded directly and indirectly by the William and Flora Hewlett Foundation and the David and Lucile Packard Foundation. Or how electronics and automotive industry seem to be bumping into each other lately.
OTHER RECENT ENFORCEMENT CASES
On 17 Sep 2015, General Motors agreed to pay the federal government a USD $900 million penalty for failing to disclose defects in ignition switches.
In November 2014, the administration announced the largest penalty ever for a violation of the Clean Air Act after the Korean automakers Hyundai and Kia agreed to pay a combined USD $300 million as part of a settlement for overstating vehicle fuel-economy standards on 1.2 million cars.
In 2013, Toyota recalled more than 10 million vehicles and agreed to pay a USD $1.2 billion settlement. Toyota had concealed information from consumers and regulators about problems that caused the cars to unexpectedly accelerate.
It is clear that proper product compliance management is much cheaper than the penalties when things go wrong.
EPA’s Notice of Violation: http://www3.epa.gov/otaq/cert/violations.htm
CARB’s In-Use Compliance Letter: http://www.arb.ca.gov/newsrel/in_use_compliance_letter.htm
ICCT Press Statement: http://www.theicct.org/news/epas-notice-violation-clean-air-act-volkswagen-press-statement