Diesel Crisis. A Status Report

To our Stakeholders

Volkswagen does not tolerate any breaches of the law or other wrongdoing. We deeply regret the behavior that gave rise to the diesel crisis. Such misconduct runs contrary to all the values that Volkswagen stands for. We have taken significant steps to strengthen accountability, extend transparency and prevent something like this from ever happening again.

The trust of our customers, our shareholders, partners, employees and the general public is our most important asset. The Group has substantially elevated its commitment to working ethically and with integrity. Volkswagen can and will set an example in the years ahead as to how a large, global company embodies and takes its social responsibility seriously.

Chronicle

1 Annual Report: In fiscal year 2016, the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) issued the official approvals needed for modification of Volkswagen Group vehicles fitted with four-cylinder EA 189 1.2 l, 1.6 l and 2.0 l diesel engines falling within its remit. Only the approval of the technical solutions for 14,000 vehicles is still outstanding, which is expected to be granted by April 2017.
2 Department of Justice (DOJ); Emission Measurements in the Automotive Sector (EMIS)

Impact

Operating result for 2016: Special items recognized in operating profit relating to the diesel issue amounted to €6.4 billion fiscal year 2016, mainly due to higher provisions for legal risks.

Legal risks: Various legal risks are associated with the diesel issue. The provisions recognized for this matter and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the independent, comprehensive investigations have not yet been completed. The legal risks include (detailed information on the legal risks can be found here):

  • Criminal and administrative proceedings worldwide (excluding the USA/Canada)
  • Product-related lawsuits worldwide (excluding the USA/Canada)
  • Lawsuits filed by investors worldwide (excluding the USA/Canada)
  • Proceedings in the USA/Canada

Should these legal risks materialize, this could result in considerable financial charges. Further risks from the diesel issue can be found in the Report on Risks and Opportunities.

Clarifying the Facts

In January 2017, Volkswagen AG agreed with the US government to resolve federal criminal liability relating to the diesel issue. The Volkswagen Group also agreed with the US government to resolve civil penalties and injunctive relief under the Clean Air Act and other civil claims against the company relating to the diesel issue.

The coordinated resolutions involve four settlements, including a plea agreement between Volkswagen AG and the DOJ. The plea agreement is accompanied by a published Statement of Facts that lays out relevant facts and has been acknowledged by Volkswagen AG.

As part of its plea agreement, Volkswagen AG has agreed to plead guilty to three felony counts under US law: conspiracy, obstruction of justice and using false statements to import cars into the US. The plea agreement, which is subject to US federal court approval, provides for payment of a criminal fine of USD 2.8 billion and the appointment of an independent monitor for a period of three years. The independent monitor will assess and oversee the company’s compliance with the terms of the resolution. This includes overseeing the implementation of measures to further strengthen compliance, reporting and monitoring systems, including an enhanced ethics program. 

Organizing the Clarification

Volkswagen AG commissioned an external investigation by US law firm Jones Day. This is an independent and comprehensive investigation to address the diesel issue. Jones Day is updating the Company and the Department of Justice (DOJ) on the current results of its investigation on an ongoing basis and supports Volkswagen AG in its cooperation with the judicial authorities. The course of action in clearing up the situation was determined largely by the investigative authorities.

Furthermore, Volkswagen AG filed a criminal complaint in September 2015 with the responsible public prosecutor’s office in Braunschweig, which is independently investigating the matter, including allegations of fraud. Searches were carried out in Wolfsburg and elsewhere with the involvement of special agents from the State Office of Criminal Investigation.

We are cooperating with all the responsible authorities to clarify these matters completely and transparently.

Investigations were divided into two parts. The Group Internal Audit function, which involved bringing together experts from various Group companies to form a task force, focused – as instructed by the Supervisory Board and Board of Management – on reviewing relevant processes, reporting and control systems as well as the accompanying infrastructure. This function paid special attention to the processes of software development for the engine control unit. The Group Internal Audit function provided its findings to the external experts from Jones Day. The internationally renowned law firm was engaged by Volkswagen AG to fully clarify the facts and responsibilities in a second investigation. Jones Day has received operational support from the auditing firm Deloitte.

The special investigation has involved conducting interviews with employees and managers who were identified by Jones Day as relevant sources of information in connection with the diesel issue. In addition, Jones Day has evaluated documents and data (such as e-mails).

Communicating the Results of the Investigation 

As already stated in April 2016, the US lawyers mandated by Volkswagen had strongly advised against publication of interim results at that time. They had a number of reasons for making this recommendation. Among other things, publication could have impaired the ongoing investigation and had a significant negative impact on the cooperation between Volkswagen and the DOJ.

How long will it take until the company is able to leave the diesel crisis behind it?

“I can’t give you an exact time period – but it will take us quite a while. Serious mistakes were made at Volkswagen. We have already paid dearly for them, and we remain committed to taking responsibility for our actions. At the same time, we are using the crisis as a starting point from which to steer Volkswagen in the right direction.”
Hans Dieter Pötsch, Chairman of the Supervisory Board, in an interview.

Actions

Monitor

The plea agreement provides for payment of a criminal fine of $2.8 billion and the appointment of an independent monitor for the next three years. The independent monitor will assess and oversee Volkswagen’s compliance with the terms of the resolution. These conditions include measures for further strengthening compliance and the reporting and control systems at Volkswagen, as well as implementing an enhanced ethics program.
Volkswagen has agreed to this solution and intends to comply with the terms of each of the agreements reached.

As part of the sought-for consent decree, Volkswagen has agreed to report on the steps it will take to further develop the processes that will enable the Group to manage the ethical behavior of employees, research and development, quality assurance and compliance with US environmental legislation.

Optimizing Processes

The initiatives implemented in response to the diesel crisis aim to further strengthen operational processes as well as reporting and control systems, in order to ensure that responsibilities are clearly and unequivocally regulated at all times. In addition, a more robust whistleblower system and new, stricter standards for performing in-house emission tests have been established. The Group has significantly expanded its voluntary commitment to act ethically and with integrity, and forged ahead with decentralization within the organization. Brands and regions can now run their business operations much more autonomously. These and other initiatives are part of a comprehensive transformation of Volkswagen's corporate culture into a more entrepreneurial, international organization.

Within the Volkswagen Group, emissions tests are now always audited by independent third parties. In addition, “real-life” tests of emission characteristics under real-world driving conditions are now carried out internally. In tests of this kind, before a model is given technical approval, a deliberate search is made for anything that indicates the possible use of a defeat device. Important: in each case, these tests must be carried out by a different department, which is/was not responsible for developing the vehicle model to be tested.

Volkswagen has not only optimized its technical processes, but also improved its general compliance organization.

Specific corrective action was proposed by Group Internal Audit for the weaknesses it identified in 2015.

As part of a structured follow-up process, implementation of corrective actions in 2016 was continuously tracked and reported to the relevant bodies. A total of 31 measures were defined by Group Internal Audit and the majority of them were implemented by the end of 2016. The plan is to implement the remaining measures by the middle of 2017.

While the procedural investigations of Group Internal Audit primarily applied to processes associated with diesel technology in 2015, the findings resulting from the investigations in the reporting period were transformed into general guidelines to shore up governance and compliance. The “Golden Rules” encourage greater attentiveness and increase acceptance of critical process steps. These rules represent minimum requirements in multiple categories, including the organization, process and tools & systems categories of control unit software development, emission classification and escalation management.

Self-assessments were performed in the Volkswagen Passenger Cars, Audi and Porsche brands to ensure structured application of the Golden Rules and thus to optimize the internal control system (ICS) in the areas affected. The results were validated as an integral part of an investigation by the audit departments in the relevant brands or by Group Internal Audit. By applying this consistent methodology across the brands, the implementation status of the guidelines in the Golden Rules was established and transparency created regarding the degree of maturity of the ICS for the relevant processes; also for the Board of Management.

In addition, a cross-brand project that ensures similar implementation of the Golden Rules while taking the individual features of the brands into account was initiated under the responsibility of Group Research and Development. As part of this, development departments within the group reviewed their processes. Representatives of the brands are working on the optimization of their processes in project groups.

Key elements of the process optimization are:

  • Early identification and interpretation of legislation around the world and alignment of the product portfolio with the legal requirements
  • Guidelines for the development of software for drive control units with documentation of the features of relevance to registration
  • Introduction of multiple controls for approvals in the product development process
  • Reorganization within development for the purpose of separating the responsibility for the development of drives from official approvals
  • Formation of new bodies for cross-brand management and clarification of compliance issues
  • Uniform process standards and work instructions that give those involved legal certainty in the work process
  • Training programs in which everyone involved in the process is required to participate
  • Regular reporting to the Group Board of Management in order to create transparency in relation to the implementation status of this process optimization

Adaptation of the Golden Rules to other vehicle development processes and other areas of development is being addressed.

Integrity Program

On January 1, 2016, we started to create the organizational framework for a centralized integrity management function by setting up the new Board of Management position for Integrity and Legal Affairs. This Group function is responsible for planning, preparing and implementing programs and projects aimed at raising, clarifying and intensifying a collective awareness of integrity, as well as reinforcing a shared culture of integrity in the Company. A continuous exchange of ideas and discussion of issues relating to integrity are key components of the integrity management function.

Volkswagen’s goal is to enhance the culture of integrity in the Company and create a collective awareness of integrity. To this end, we launched an integrity program in 2016 involving all employees that is based on six action areas:

  1. Dialog & communication: We provided information at regular intervals on the concept of integrity and its importance as well as on the evolution of the integrity program. In addition, we set up an integrity mailbox to create opportunities for direct communication between the integrity management team and the workforce. An exchange in the form of a live chat also took place on the GroupConnect internal social network.
  2. Sounding Board program: A shared understanding of what integrity means at Volkswagen can only be developed with the involvement and the experience of the entire workforce. This is why we have instituted the Sounding Board program as a key initiative in the integrity program. It will ensure close collaboration and dialog between the integrity management team and the workforce with the help of integrity ambassadors – voluntary support staff from management and staff circles. Interactive services forming part of this program round off the communications portfolio.
  3. Executive program: Management’s function as a role model for integrity along with managers’ special responsibility was clearly illustrated in a letter signed by all members of the Group Board of Management and in supplementary information circulated to executives and managers. The topic of integrity was also a fixed part of numerous management events.
  4. Processes & tools: We are continuously examining the possibility of incorporating our principles of integrity into the Company’s key management elements, for example in the field of human resources and collaboration with business partners.
  5. Monitoring & reporting: Regular monitoring of the integrity program not only helps us to fine-tune and readjust; it also underlines the relevance of the concept of integrity for employees and managers. Here, continuous evaluation of feedback from the integrity ambassadors and from employees and managers on issues relating to the adaptation and refinement of concepts plays just as important a role as the reporting in internal media and publications such as the sustainability report.
  6. Internationalization: Once the pilot phase at the Wolfsburg site has ended, we intend to expand the integrity program to all brands, companies and regions. Managers of our Governance and Risk & Compliance functions will act as key intermediaries in this context.

More information is available here.