Daimler AG and subsidiary Mercedes-Benz USA have reached a proposed settlement with U.S. authorities totaling $1.5 billion in fines and other costs to resolve emissions-cheating allegations.

The proposed settlement, announced Monday, addresses allegations made by the United States and the California Air Resources Board (CARB) in separate civil complaints. According to the allegations, from 2009 to 2016, Daimler “manufactured, imported, and sold” more than 250,000 diesel vehicles with undisclosed auxiliary emission control devices (AECDs) and defeat devices designed to circumvent U.S. emissions-testing processes to make it appear the vehicles complied with U.S. emissions standards when they did not.

Daimler first disclosed the company’s agreement in principle with the authorities on Aug. 13. The U.S. District Court for the District of Columbia must still approve the settlement.

Under the proposed settlement, Daimler will pay $875 million in civil penalties and roughly $70.3 million in other penalties. It must also recall and repair the emissions systems in Mercedes-Benz diesel vehicles sold in the United States between 2009 and 2016.

Additionally, Daimler will have to shell out an additional $436 million, costs that will go toward extending the warranty period for certain parts in the repaired vehicles, performing projects to mitigate excess ozone-creating nitrogen oxides emitted from the vehicles, and implementing new internal audit procedures designed to prevent future emissions cheating. The company will pay another $110 million to fund mitigation projects in California.

Compliance obligations

The proposed settlement further requires Daimler to implement systemic corporate reforms. Such compliance enhancements include:

A robust whistleblower system: Employees must have the option to anonymously “report, investigate, and mitigate any environmental compliance issues,” the consent decree states. Furthermore, employees in Germany have the option to make reports to an independent external attorney, who shall be available to receive and forward anonymous whistleblower reports, according to the consent decree.

Daimler has further launched a communication campaign within research and development (R&D) to promote the whistleblower program. By Dec. 31, Daimler must test and measure the reach of the communication campaign “by way of a dedicated anonymous survey among all addressed audiences,” the consent decree states.

The survey’s results shall be used to further develop additional communication and improvement of the whistleblower program. The communication campaign must last until at least Dec. 31, 2021.

Supplier integrity management controls: By Dec. 31, 2020, the consent decree states, Daimler must enhance the terms and conditions in their standard supplier contracts “to include an explicit requirement to comply with technical regulations and laws, which include laws and regulations governing vehicle emissions and certification.”

Also, as of June 30, Daimler must establish and maintain a list of suppliers whose emission-related part or service result in violations of U.S. or California vehicle emissions or certification regulations or laws, or that “have been found by a governmental environmental agency to have violated U.S. or California vehicle emissions or certification regulations or laws in an administrative agreement, consent decree, settlement agreement, or other formal judgment or adjudication.”

Enhanced training: Daimler is also required, as of Dec. 31, 2019, to provide specific mandatory training on U.S. and California emissions and certification regulations and law, including on AECDs and defeat devices, to relevant R&D department employees. The company must also periodically evaluate which employees should receive this training.

Internal audit requirements: As of Sept. 1, 2020, Daimler shall designate an audit department with audit teams within corporate audit dedicated specifically to environmental compliance and tCMS (technical compliance management system). The audit team “shall have the expertise, responsibility, independence, and authority to assess environmental compliance with United States and California regulations and laws concerning vehicle emissions and certification,” the consent decree states. The internal audits will be subject to review and critiqued by an external compliance consultant.

The involved U.S. authorities are the Environmental Protection Agency (EPA), CARB, the Environment and Natural Resources Division of the Department of Justice, the California Attorney General’s Office, and Customs and Border Protection. “The company has fully cooperated with the U.S. authorities” and “has not received a Notice of Violation from the EPA or the CARB during this process,” Daimler said.

“The settlement resolves the company’s pending civil proceedings with the U.S. authorities without reaching any determinations as to whether functionalities in Daimler’s vehicles are defeat devices,” Daimler added. The company continues to deny the authorities’ allegations and does not admit any liability.

Daimler also has pending a related class-action settlement estimated to be worth $700 million before the U.S. District Court for the District of New Jersey.