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Volkswagen Reaches Deal in U.S. Over Emissions Scandal

Volkswagen agreed on Thursday to fix or buy back nearly 500,000 diesel cars in the United States that are equipped with illegal emissions software.

But a settlement announced in federal court in San Francisco left open numerous legal and financial issues stemming from the carmaker's admission that it rigged diesel vehicles to cheat on pollution tests.

Lawyers in the case are still negotiating the fines that Volkswagen must pay, as well as the compensation that owners will receive. Judge Charles R. Breyer set June 21 as the deadline for Volkswagen to settle those questions with the federal government as well as lawyers for vehicle owners.

"There is still a lot of work to be done," Judge Breyer said.

It is already clear, though, that Volkswagen will have to increase the amount it has set aside to cover costs of the emissions scandal, which will easily run into billions of dollars.

Kelley Blue Book, a research firm, has estimated the cost of buying back all the cars in the United States at $7 billion. The company is certain to face additional billions in fines and compensation paid to owners beyond the costs of repairs or buybacks in the United States. And there are many more faulty cars in Europe and elsewhere in the world still to be dealt with.

Volkswagen has set aside only 6.7 billion euros, or $7.6 billion, against the eventual global costs from the scandal.

"If they agree to buy back the cars, the costs will be higher than the current provisions," said Matthias Hellstern, managing director for corporate finance at Moody's Investors Service in Frankfurt.

Kevin Helmich, owner of a 2010 Audi A3 with a diesel engine, said on Thursday that he would lean toward having the company buy his car back rather than get it repaired. Volkswagen is "making a real effort to do right by customers," said Mr. Helmich, who lives in Ann Arbor, Mich. But he added, "I probably wouldn't buy another car from them."

Volkswagen faces a theoretical maximum government fine of $18 billion in the United States. Legal experts expect the legal penalties to be much lower, but still in the billions. Judge Breyer said that owners would also receive "substantial compensation."

And the company could still be hit with criminal charges by the Justice Department, which is investigating Volkswagen's cheating.

Under the agreement announced Thursday, the company will offset some of the environmental damage caused by the cars by investing in clean technologies. The judge did not give details about the form the investment might take.

In a statement, Volkswagen said it "intends to compensate its customers fully and to remediate any impact on the environment from excess diesel emissions."

While many questions remain unanswered, the court hearing on Thursday suggested that Volkswagen and those with claims against it had made substantial progress toward a settlement that would clear up some of the company's financial uncertainty. It should also help Volkswagen restore some good will with owners of 480,000 Volkswagens and Audi A3 models with the affected 2-liter diesel engines.

The models with the cheating software in the United States include Volkswagen, Audi and Porsche cars with 2-liter or 3-liter diesel engines from the model years 2008-15.

Owners will have the option either to get their cars fixed so they are compliant with clean-air laws, or sell them back to the company. People who have leased vehicles will be able to cancel their contracts without penalty. But a solution for about 100,000 cars with 3-liter diesel engines, including Audi and Porsche models, has not yet been agreed to, the judge indicated.

"I wish we had more details, and I wish we could get back to the business of selling" diesel models, said Alan Brown, owner of a Volkswagen dealership in Lewisville, Tex. "But it's great to see we've got movement. Without customers, none of us dealers has a business."

Many more European cars, over 10 million, are also affected by the Volkswagen cheating. But the company's financial fines and any consumer liabilities in Europe are not expected to be nearly as high because of differences in air-quality regulations and consumer-protection laws.

Given the uncertainties over the potential costs of the United States settlement, Volkswagen has delayed earnings reports for the last two quarters. That has impaired the company's ability to raise money on debt markets because it could not provide financial information demanded by investors.

And even when the details of Thursday's announced settlement emerge, the company's troubles will be far from over. It faces official investigations and possible criminal proceedings in other countries, including Britain, France, Germany and South Korea. And owners of its models in Europe, who account for a vast majority of the 11 million diesel vehicles with the cheating software, are angry that they are not receiving any compensation.

Volkswagen is recalling the cars in Europe to reprogram the engine software and, in some cases, to install a plastic part that is supposed to help lower emissions. But it has balked at offering European owners money.

Analysts at the investment bank UBS had estimated the total cost of the scandal for Volkswagen at 38 billion euros, or about $43.1 billion, of which 14 billion was for expenses outside the United States.

Judge Breyer had given Volkswagen until Thursday to reach a settlement with the federal government and with vehicle owners in the United States. The judge had expressed dissatisfaction that the cars were still on the road emitting illegal levels of pollution seven months after the cheating became public.

The defeat device allowed Volkswagen to cheat on the emissions tests in the United States by recognizing when cars were being monitored and changing the exhaust settings. In testing, the cars reduced pollution controls.

But on the road, pollution controls were scaled back to enhance performance and fuel mileage, and to protect emissions equipment from wear. When that happened, the cars spewed as much as 40 times the allowed amounts of nitrogen oxides, a pollutant that poses health hazards.

Judge Breyer is overseeing almost all of the litigation in the United States, including claims filed by federal and state governments as well as Volkswagen owners. The company still faces separate suits by Volkswagen dealers and by dealers of competing brands, who say the cheating gave Volkswagen an unfair advantage in the market.

Eric T. Schneiderman, the New York attorney general, said Thursday's announcement "does not in any way resolve" claims being pursued by a six-state coalition, which he said would continue its investigation and pursuit of penalties. The states have not yet filed a suit against Volkswagen.

Volkswagen's legal troubles were focused in the United States because limits on nitrogen oxides are more stringent and the penalties more severe than in Europe. In addition, United States law gives owners significant scope to seek redress in court.

Rob Martens, a retired musician in Boulder, Colo., said he was eager to have Volkswagen buy back his 2015 Passat diesel. While he likes the car's roominess and ride, he's not happy to be driving a car that emits more pollutants than it should. On top of that, the car's electronics have given him headaches — its infotainment system often freezes up and its rearview camera sometimes goes out.

"This is not what they call German engineering," Mr. Martens said. "I can't wait to dump it."

[Source: By Jack Ewing, The New York Times, 21Apr16]

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Corruption and Organized Crime
small logoThis document has been published on 25Apr16 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.