Dieselgate: A Milestone for Environmental Compliance

Image: (AFP/Tolga AKMEN)

The global Volkswagen scandal defines the turning point for compliance programs in the environmental and climate field.

With the judgment of the first class action in the history of the German judiciary, the emblematic Dieselgate case involving the German automaker Volkswagen resonates not only within the foundations of Economic Criminal Law, in relation to the liability of legal entities, but above all brings reflections concerning compliance in the area of environmental and climate regulation, given its importance for controlling activities that impact the environment.

The term Dieselgate (Abgasskandal, in German) alludes to the historic Watergate episode, which occurred during the presidency of Richard Nixon in 1974. It constitutes a watershed for the doctrine of compliance programs worldwide, being considered by experts as one of the most relevant “biggest cases of corporate fraud,” indicative of the need for compliance in organizations and in key economic sectors.

Discovered in 2015 by the U.S. Environmental Protection Agency (EPA), Dieselgate is essentially a case of fraud involving the structure of diesel-powered cars manufactured by the German automaker between 2009 and 2015, through the deliberate installation of software designed to manipulate the true level of polluting gas emissions from the vehicles.

The mechanism worked by reducing emissions when the vehicles were subjected to testing by the agency. In total, approximately 11 million vehicles are estimated to have been equipped with the programmed falsification of carbon dioxide and nitrogen oxide emissions—the latter known as NOx, highly harmful to the atmosphere. Emissions of up to 40 times more nitrogen oxide than permitted were concealed during the combustion of the so-called “TDI clean diesel.”

Notwithstanding these conditions, the former CEO of the German company, according to disclosed data, had knowledge of the internal procedures for the fraud at least one year before the investigations began, and, even when in possession of irregular reports, took no action. When testifying before the U.S. Congress, he was harshly criticized for the breach of public trust in Volkswagen.

Perhaps the central point of the case lies in the fact that the automaker’s compliance officer was sentenced to prison—the very authority of Volkswagen’s internal compliance department in the United States between 2012 and 2015, and the key figure in the scheme.

The repercussions reached the Brazilian judiciary, as evidenced by a conviction issued by the Rio de Janeiro courts, already in the enforcement phase, ordering the German manufacturer to pay compensation of BRL 10,000 for moral damages to approximately 17,000 Amarok model vehicle owners.

In the ruling issued by the 9th Civil Chamber of the Rio de Janeiro Court of Justice, the reporting judge emphasized: “automobiles with hidden defects, software designed to defraud the measurement of toxic gases emitted by diesel combustion. ‘Dieselgate’ case, as this wrongdoing is denominated.”

Volkswagen itself had, in 2014, recognized its commitment to sustainability in the production of new vehicles, through an open letter of environmental intentions to Greenpeace Brazil, which was subsequently undermined by the episode.

Undoubtedly, the ineffectiveness (or subversion) of the compliance program in this case of the German company is evident—not only in relation to the prevention of fraud and corruption but also in the observance of minimum environmental and climate standards. In addition to the economic losses caused to the organization, shareholders, and stakeholders, there was an immeasurable impact on the company’s institutional image, forcing the automaker to invest globally in electric vehicles.

These environmental and climate consequences bring to the fore the discussion on the role of compliance as a vehicle of environmental guidance, through its implementation in private—and also public—organizations as a comprehensive legal compliance program, with a sector responsible for preventing, detecting, and internally sanctioning instances of non-compliance, particularly with environmental and emissions legislation.

Through effective compliance in private institutions with significant environmental impacts, it is possible to foster a new relationship in decision-making processes, supporting oversight through greater transparency, prevention, and prior adherence to rules, thereby reinforcing state regulation. In this sense, the doctrine of Criminal and Administrative Law has discussed the phenomenon of “regulated self-regulation,” which, when applied to Environmental Law, may provide new means of participation and of fostering compliance with environmental norms and laws, both internally and externally.

One must not forget that pollution from gas emissions such as those concealed by Volkswagen kills more people worldwide than AIDS and malaria combined, according to the World Health Organization (WHO).

It is unjustifiable to attribute this merely to a lack of monitoring of conduct in organizations such as the automaker, particularly given the environmental, climate, and human effects caused. Precisely in these cases of major environmental violations or irregularities by multinationals, compliance must be improved, both for a better understanding of corporate liability and for the prevention and mitigation of similar cases.

It is no coincidence that the final report of the Brazilian Federal Senate’s

Parliamentary Inquiry Committee on the Brumadinho disaster highlighted that “the hypothesis of organizational defect in the company (Vale) refers to the lack of coordination of incentives for directors, managers, and employees that would have prioritized risk control and compliance with the law. A flawed governance and compliance system played a significant role in the chain of causality that led to the dam collapse.”

Indeed, such peculiarities are applicable to Dieselgate and to the Brumadinho tragedy: multinationals with complex organizational structures requiring the application of comprehensive and effective environmental compliance in their core activities. Automakers such as Audi, Porsche, and Mercedes-Benz are also under investigation for the same matter.

This entire scenario implies an undeniable reassessment of fundamental institutes of Economic Criminal Law—competition in the automotive sector and the regulation of its impacts—as well as of Administrative and Environmental Law, given the need to re-signify the state’s functions of command and control and of fostering compliance with environmental protection rules and laws, while always rejecting “window-dressing” compliance programs and greenwashing. The Dieselgate case, with all its repercussions, stands as a milestone for the requirement of such programs.

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[Automatically translated]

Article adapted from the original, published on 10/24/2019, on the JOTA platform

Author: Bruno Teixeira Peixoto