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IAV to pay $35M in emissions-cheating scandal

Editor's Note: This post has been updated with a statement from IAV.

IAV GmbH (IAV), a German company that engineers and designs automotive systems, will pay a $35 million criminal fine for its role in a long-running emissions-cheating scandal concerning Volkswagen, the Department of Justice announced.

IAV is charged with, and has agreed to plead guilty to, one count of conspiracy to defraud the United States and Volkswagen’s U.S. customers and for violating the Clean Air Act by misleading the EPA and U.S. customers about whether certain Volkswagen- and Audi-branded diesel vehicles complied with U.S. vehicle emissions standards. IAV and its co-conspirators knew the vehicles did not meet U.S. emissions standards and worked collaboratively to design, test, and implement software to cheat the U.S. testing process. IAV also was aware that Volkswagen concealed material facts about its cheating from federal and state regulators and U.S. customers.

Under the terms of the plea agreement, which must be accepted by the court, IAV will plead guilty to this crime, will serve probation for two years, will be under an independent corporate compliance monitor who will oversee the company for two years, and will fully cooperate in the Justice Department’s ongoing investigation and prosecution of individuals responsible for these crimes.

Under the U.S. Sentencing Guidelines, IAV’s $35 million fine was set according to the company’s inability to pay a higher fine amount without jeopardizing its continued viability. IAV is scheduled to appear for a change of plea hearing before the Honorable Sean Cox of the U.S. District Court for the Eastern District of Michigan on Jan. 18, 2019.

“Our investigation into emissions cheating is ongoing and we will follow the evidence wherever it leads,” Principal Deputy Assistant Attorney General John Cronan said in a statement.

Case details

The guilty plea of IAV represents the most recent charges in an ongoing investigation by U.S. criminal authorities into unprecedented emissions cheating by Volkswagen. In March 2017, Volkswagen pleaded guilty to criminal charges that it deceived U.S. regulatory agencies, including the EPA and the California Air Resources Board, by installing defeat devices in diesel vehicles emissions control systems that were designed to cheat emissions tests.

As part of its plea agreement with the Department, Volkswagen paid a criminal fine of $2.8 billion and agreed to an independent corporate compliance monitor for three years. Eight individuals were previously indicted in connection with this matter, two of whom have pleaded guilty and been sentenced. The other six charged defendants are believed to reside in Germany.

According to the statement of facts that will be filed with the court in IAV’s case, in 2006, Volkswagen engineers began to design a new diesel engine to meet stricter U.S. emissions standards that would take effect by model year 2007. This new engine would be the cornerstone of a new project to sell diesel vehicles in the United States that would be marketed to buyers as “clean diesel.” When the co-conspirators realized that they could not design a diesel engine that would both meet the stricter standards for nitrogen oxides (NOx) and attract sufficient customer demand in the U.S. market, they decided they would use a software function to cheat the U.S. emissions tests.

Volkswagen delegated certain tasks associated with designing its new “Gen 1” diesel engine to IAV, including parts of software development, diesel development, and exhaust after-treatment. In November 2006, a Volkswagen employee requested that an IAV employee assist in the design of defeat device software for use in the diesel engine.

The IAV employee agreed to do so and prepared documentation for a software design change to recognize whether a vehicle was undergoing standard U.S. emissions testing on a dynamometer or it was being driven on the road under normal driving conditions. If the software detected that the vehicle was not being tested, the vehicle’s emissions control systems were reduced substantially, causing the vehicle to emit substantially higher NOx, sometimes 35 times higher than U.S. standards.

By at least 2008, an IAV manager knew the purpose of the defeat device software, instructed IAV employees to continue working on the project, and directed IAV employees to route VW’s requests regarding the defeat device software through him; the manager was involved in coordinating IAV’s continued work on it.

Starting with the first model year (2009) of VW’s new “clean diesel” Gen 1 engine through model year 2014, IAV and its co-conspirators caused defeat device software to be installed on all of the approximately 335,000 Gen 1 vehicles that VW sold in the United States.

IAV's response

“We take these matters very seriously and see this resolution as an important step forward for our company,” Kai-Stefan Linnenkohl, president and member of the IAV management board, said in a statement. “The misconduct identified does not reflect who we are as a company today. We are committed to a culture of compliance and accountability at IAV and to serving as a reliable partner for our customers and the automotive industry.”

The agreement notes that IAV played a minor role in the offense and that the company has already taken steps to enhance its compliance programs and internal controls.

Linnenkohl added, “We strongly believe that having comprehensive compliance and risk management systems in place will be increasingly important as the automotive industry becomes more fast-paced with new technologies, regulations, and consumer expectations. Our goal at IAV is to ensure we are equipped to respond quickly and with good judgment to industry needs, while fully understanding the regulatory, legal, and ethical implications of evolving technologies and trends.”

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