Prosecutors' Penalties Clawing Back VW’s Profits

VW faces the confiscation of some of the profits it made with selling manipulated diesel cars as German public prosecutors seek to fine the carmaker over its emissions rigging. The company might have to pay hundreds of million of euros.
VW could face fines in Germany.

Increased pressure is coming to bear on the Volkswagen Group in the diesel affair. The public prosecutor for the city of Braunschweig has launched penalty procedures against the company under the Administrative Offenses Act. This means that in addition to the already expected billions of euros in U.S. fines, the automaker may have to pay hundreds of millions more.

The prosecutor's office in Braunschweig confirmed the new investigation. "We have initiated this procedure against VW as a company," said prosecutor Klaus Ziehe over the weekend. Individuals would not be singled out in the investigation, he said, confirming a report by German newspaper Süddeutsche Zeitung and public broadcasters WDR and NDR.

Preliminary estimates already indicate more than €13 billion being spent in the United States, but this figure only includes the consequences of civil suits, not the criminal investigation by the U.S. authorities.

The case against Volkswagen threatens more than conventional violation fines for the sale of 11 million rigged diesel vehicles, which emit more toxic nitrogen oxide gases than European and U.S. laws allow.

It’s the possibility of eating into its profits that would be more serious in this case. If VW lost this suit, it would have to give up part of the profits that the automaker had earned through fraudulent sales of diesel cars over the past few years.

Public prosecutor Ziehe said that would apply to worldwide profits, not just to those sold in Germany. VW started using the manipulated software about 10 years ago, and it made dozens of billions of euros in profit during over that period, although only a proportion of these earnings came from rigged diesel sales.

 

22 p34 VW's Long Term Earnings-01 Volkswagen

 

When calculating the amount of illegal profits, it is common for German prosecutors to include criminal fines from other countries. German investigators are expected to be looking primarily to the Americans in this regard.

However, in the United States there remains an open question as to how Volkswagen may be criminally liable for the manipulation of the diesel autos. The company agreed to a cash settlement of up to $15.3 billion, or €13.9 billion, with customers, state attorneys and U.S. environmental regulators late last month, but this only covers civil complaints. Criminal investigations into both the company and the responsible VW managers are not affected by that agreement and these could raise the U.S. bill further.

Volkswagen is not the first major corporation to be placed under proceedings of this kind. Siemens had similar experiences in its corruption scandal: At the request of the U.S. Department of Justice, the Munich company was fined $450 million in addition to the confiscation of profits of $350 million (€317 million). In Germany, the Munich prosecutor had imposed an administrative penalty of €395 million on Siemens.

Similarly, the Swiss bank UBS has paid a €300-million fine to Germany for aiding and abetting tax evasion and Credit Suisse paid €150 million.

On Sunday, a Volkswagen spokesman said that the company was only aware of the new German case from media coverage. The company is also not planning on setting aside more money related to the diesel auto manipulation, he said. Volkswagen has so far set aside €16.2 billion to defray the costs of the scandal.

“According to our current calculations, that amount is sufficient,” VW CEO Matthias Müller told Handelsblatt at the end of June.

 

11 p20 VW’s Top Earners-01 Volkswagen Winterkorn Matthias Müller CEO chief executive

 

Nor is there any reason to dock management pay retroactively because of the scandal, he said. “Why should we punish management for doing a good job in 2013?” Mr. Müller said.

The Braunschweig prosecutors apparently take a different view. They’re analyzing profits from every year when cars were sold with the engine software which enabled the diesel manipulation. The IT trickery made the cars look compliant with environmental laws when tested, but on the road, the environmental mode was turned off and the cars emitted far more gases than laws allow.

Of the €16.2 billion set aside, the bulk will likely be used by Volkswagen in the dispute with U.S. authorities and American owners of the affected cars.

One major area of uncertainty for VW is the claims of its shareholders. In Braunschweig, many shareholders have submitted complaints. Klaus Nieding, vice-president of the German private shareholder association DSW, said he expects that about another €10 billion in costs could arise.

It’s also still not known if European motorists might expect compensation similar to what the company has offered in the United States. That could mean billions more in costs and VW is pushing back against that possibility, pointing to legal differences in the United States and Europe.

VW's preference shares were unaffected by the new legal proceedings and traded up 2.5 percent at €112.80 by 10:02 a.m. in Frankfurt amid a broad rise of European stocks. The company's share price is still down 30.5 percent compared with the level seen last September, when U.S. regulators revealed the scandal.

 

Stefan Menzel is the managing editor of Handelsblatt’s website and closely follows the car industry. Volker Votsmeier is an editor with Handelsblatt’s investigative reporting team. To contact the authors:[email protected] and [email protected]