In this Real News Network interview, Bill Black examines the VW emissions scandal examines the Volkswagen (VW) emissions scandal and discusses how corruption has become endemic in corporate Germany, and why the SEC and DoJ are targeting VW.
Black is the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United.
MARC STEINER Welcome to The Real News Network. I’m Marc Steiner. Great to have you all with us. Martin Winterkorn, the former C.E.O. of Volkswagen, is on trial in Germany. He could face up to 10 years in prison. In 2015, researchers at West Virginia University found that V.W. had been using illegal software to pass emissions tests even though the engines themselves continued to admit noxious gases. V.W. admitted it was using illegal software back in 2015, in September of that year. The U.S. wants to extradite Winterkorn, though that will probably not happen because Germany does not extradite its own citizens. But most importantly for this discussion, why should this concern us at all? What does it mean? Why is it important? And what do we need to understand about this in terms of corporate abuse of power and responsibility? To walk us through all this, we once again turn to Bill Black, Associate Professor of Economics and Law at the University of Missouri-Kansas City, and author of The Best Way to Rob a Bank is to Own One, and a regular contributor here at Real News. Bill, welcome back. Good to have you with us again.
BILL BLACK Thank you.
MARC STEINER So where do we start with this? I remember when this happened a few years back when this first came out and is being prosecuted at this moment but talk about why this particular case is so important, what it means.
BILL BLACK Sure. Let’s go back to when it actually happened which is not in 2015, but many years before. So V.W.’s global strategy was they were going to become the biggest car company in the world and they were going to do it the old-fashioned way, by cheating. So they had an impossible task and it’s a classic example of too good to be true. They were going to start with diesel fuel because that had lots of advantages in terms of producing a relatively cheaper engine. Even though diesel fuel inherently tends to be more polluting, they were going to do some miracle and it was going to end up being an extraordinarily low-emissions automobile. Only one problem— it didn’t work and it never worked. So what’s the obvious answer when your fraud scheme fails? You create a second fraud scheme and the second fraud scheme was to claim that you met the emissions levels. But of course, people were going to test that, so you needed a third-stage fraud scheme. We’re all in awe of German technology and such, and V.W. is at the top of the game, but a) V.W. couldn’t in fact produce clean diesel any more than you could create clean coal, and b) it didn’t have the technology to create the cover up. The cover up is just basically an algorithm. The algorithm says, oh, we’ve got sensors because a modern vehicle is really a whole bunch of sensors. It’s really a whole bunch of computer chips and we sense the following sixteen things are happening. We’re being tested for emissions level and the algorithm says, okay let’s change how the engine performs. And under the new way the engine performs, emission levels fall enormously. It’s just if you actually ran the engine that way, not on a test bed but on a road, you could go 20 miles an hour, so it doesn’t work as a vehicle. It is a pure scam and it’s not a little scam. It’s not like V.W. failed to meet the emissions level by a little bit. The actual emission levels of nitrous oxides in particular can be twenty times the emission levels permitted. So this is a massive scandal and because V.W. lacked the expertise to do the algorithm instrumentation scam internally, they actually outsourced it. So they outsource their cover-up fraud, where another company was happy to create a software— the sole purpose for the software being, to cover up a massive fraud.
MARC STEINER And it worked.
BILL BLACK And it worked, and they sold 12 million vehicles globally, 500,000 in the United States, under this double fraud thing that their engine actually was low-emissions and that they didn’t do anything to the testing. It was all completely kosher when it was in fact all completely rigged. First thing, this was spectacularly successful. It allowed V.W. to become the largest car producer in the world, create enormous profits, and millions of euros went into the pockets of the…
MARC STEINER All from this one act, from creating this piece of software?
BILL BLACK Two acts, two acts. One, from creating the engine that didn’t work [laughter]. And two, from creating the engine that didn’t work, but was cheap. And then, creating the software to hide the fact that the engine didn’t work. So it’s actually those two acts that were critical to their “success.” It was enormously successful. The company made a ton of money. The chief executives made a ton of money. The software company that created the device solely to be a scam made a ton of money. Everybody was happy except, of course, for the honest competitors and, of course, for the fact that this actually kills people. The nitrous oxides aren’t the absolute most lethal things, but the bottom line is they were literally willing to kill people through massive frauds on 12 million vehicle sales in order to become personally wealthy when they were already extraordinarily wealthy people. So that tells you about corporations.
MARC STEINER Well let’s take this to where we live right now, what’s happening now. So Martin Winterkorn, the former C.E.O., is on trial in Germany. He may go to prison if he’s convicted, seven to ten years is what I read. Talk about what’s going on between our two countries around this. Corporate leaders from the bank fallout to everything else have gotten away with murder all the time. They never go to jail. They never have to answer individually to what they’ve done. So what’s different here, if anything?
BILL BLACK Well it’s not clear that anything will end up being different. And some of them do go to jail. It’s just that the graph in the United States, super elite frauds look like this. Convictions are declining under every administration for the last four administrations, that included Obama, but of course it’s off the charts now. And the Trump administration, we’ll come back to why would the Trump administration actually be willing to be tough on the Germans, but let’s start with your broader question. So Germany is actually the place that gave us Transparency International. This is the global anti-corruption group of ex-businesspeople and their story is, oh, there are these poor companies all honest in the global north and they want to do business, and unfortunately the global south is enormously corrupt. And so, it creates transparency and anti-corruption scales. And guess who’s the best in the nation usually, the best in the world usually, among advanced nations? Why, that would be Germany. And where are the bad places? Well that’s all those people with brown skin, except that now this isn’t just the most prominent firm in Germany. Deutsche Bank, the champion Bank of Germany…
MARC STEINER That we talked about a few weeks ago together. Yes, right.
BILL BLACK Right, just a massive criminal enterprise with actually scores of scams and felonies.
MARC STEINER And they’re involved in this scandal, as well?
BILL BLACK No, no, no, but this is Germany. It’s Siemens, their absolute star in industry that turned out they were bribing all those folks, internationally. So Germany has a crisis. Germany has massive tax evasion by the wealthy, as well. So they not only cheat and become wealthy by cheating, but then they’re such S.O.B.’s that they don’t want to pay any taxes on these massive gains, so they cheat on their taxes, as well. Lots of Germans are absolutely disgusted with this and see this as basically the death of what used to be some degree of German ethics so it’s hitting there. In Germany, this has become such a scandal that they actually started investigating. They had a raid involving 300 investigators. Imagine that in the United States context. And they’re alleging that it isn’t just Volkswagen and its affiliates. They’re alleging that there is— they, being German authorities— that there is a cartel among the leading manufacturers. In other words, Mercedes along with V.W. in particular, in which the agreement is not to develop safety standards, particularly better emitting engines by far. And so, the German authorities think that’s a very real thing that they’re currently investigating. Germany has little history of putting senior executives in prison for any significant time. Even when they’re initially sentenced to five years, it’s very common that they don’t serve more than a fraction of that time period. So we’ll see whether they’re willing to do anything.
MARC STEINER So tell me, what I would like to get to, Bill, is two things very quickly because we don’t have a lot of time is that: a) why is it so important for us to be following, from your perspective? And b) what role, the U.S. is playing a very different role than we expected them to play. They are really trying to extradite Winterkorn. It seems like they are being a little aggressive in this one, which they have not been for other industries, especially in this country. So tackle those two things, if you could for us.
BILL BLACK So the four most important firms in Germany are all involved in these series of modern scandals. So everywhere a German, educated German, looks they go, oh blank, we have become a nation that is profoundly corrupt. And that’s created a Gresham’s dynamic in which everybody that wants to stay in business, has to get corrupt as well. And these incredibly wealthy people are willing to cheat to get even wealthier and they’ll do so even if they have to kill people. Now the U.S., and what’s interesting of course is we’ve talked about it. There has been a collapse of enforcement at every major federal agency. So why has the Securities and Exchange Commission just a month ago filed this very vigorous action against V.W., and we have the Justice Department being active? Well, it’s because Donald Trump has been saying openly in recent days, it all comes down to car exports. He’s done this in the Mexican context, but actually U.S. and German automobile manufacturers are heavily involved in Mexico for export to the U.S. and other markets, as well. Trump is focused entirely on automobiles in his great trade battles and this is an opportunity to really stick it to a global rival. So now we have the…
MARC STEINER So this is an exercise in nationalism really, and not an exercise in any kind of corporate accountability.
BILL BLACK Worse. It’s an exercise in selective prosecution to actually help domestic giants who themselves commit all kinds of violations of the law, as well. And so, it’s the further breakdown of the rule of law in the United States and the personalization where you see Trump wants to use the powers of the government to go after anyone he views as a political or economic opponent.
MARC STEINER So this conversation has been a lesson in don’t believe all the headlines and do understand what’s beneath them, which Bill Black brings to us all the time. Bill Black, thank you so much. This has really been enlightening. I appreciate your time once again. Great to talk to you, as always.
BILL BLACK [inaudible]
MARC STEINER [laughter] And I’m Marc Steiner here at The Real News Network. Thank you all for watching. Take care.
Bill Black gets a few things wrong here, so I’ll try to clarify.
Diesel engine vehicles are more expensive than gasoline due to higher system cost, not necessarily engine itself, but after-treatment systems are significantly more expensive for diesel. Their benefit is that they can be operated more efficiently, producing better fuel economy. Europe has more stringent fuel economy regulation than North America, so this was the big attraction for the automakers.
Diesel engine can be operated in a way that produces emissions that meet the regulatory requirement by shifting the air-to-fuel ratios, but at a cost. Fuel economy benefits are reduced and the urea tank needs to be larger, making it a difficult fit on a passenger vehicle. At this point, there is not much benefit to a diesel engine over gasoline as it makes it even more expensive with a diminished fuel economy benefit.
VW had the technology in place to meet emissions regulation. The cost of parts would have been about $150 per vehicle, in addition to increased fuel and urea consumption. It involved addition of the Lean NOx Trap (LNT) into the existing exhaust system and reprogramming the vehicle’s urea system to allow LNT regeneration. The main reasons the system wasn’t implemented was the cost, $150 per vehicle adds up pretty quickly and the weight considerations behind a larger urea tank, requiring body redesign to make it fit. On a side note, urea system is the sticking point for all diesel manufacturers. Most of them were caught gaming the use of urea in the last few years, including GM and Chrysler in North America.
VW’s R&D structure makes it impossible for the cheat to have been implemented without the knowledge of senior management. VW splits diesel engine development, engines under 3.0L are developed by the VW team in Wolfsburg and 3.0L and above are developed by the Audi team in Neckarsulm. Same engines are then used company-wide, for example Audi’s use VW engines under 3.0L and VW and Porsche use Audi engines at 3.0L and above. The two teams are very competitive, so the fact that both engine lines were involved means that this solution was mandated by the VW corporate, rather than being developed by the engineering teams.
VW has not only committed a regulatory breach, but also a financial crime (defrauding the government). Companies that do not meet the required fuel economy targets pay financial compensation to the government. For example, in US they gain EPA credits that are carried over year-to-year and are openly traded by companies like Tesla, who just made a deal with Fiat-Chrysler. Thanks to the fix, VW was receiving emissions credits whereas it should have been paying penalties. This makes the criminal persecution much easier.
Car companies run cartels for technology development everywhere, not just Germany. US one is United States Council for Automotive Research (USCAR). These develop technology that is then freely accessible to the cartel members. Increasingly, R&D has been pushed off the company flagship down the supply chain to Tier 1 and Tier 2 suppliers, funded by entities like USCAR.
Hopefully, this provides a better technical background to a more general discussion by Bill Black.
> . . . The two teams are very competitive, so the fact that both engine lines were involved means that this solution was mandated by the VW corporate . . .
This “solution” being to play it straight on the 3.0 liter + engines and add the urea system and on the under 3 liter, cheat?
Possibly margin & total system cost compared to list price? 3.0 liter engines are usually near the top of the line for VW/Audi, so margin on a 3.0 liter car would be more able to absorb $150+ in additional cost.
interesting. so when Bill Black says clean diesel is as impossible as clean coal, is this correct? By your explanation I am wondering if it is possible to clean coal up with urea, etc.
no, nothing cleans up the CO2, diesel or coal. Diesel wthout soot traps and NOX reduction is extra nasty. Urea cleans up the NOX.
I worked in R&D in the electronics industry and one aspect of the story does not wash with me.
” Everybody was happy except, of course, for the honest competitors…”
Extrapolating my experience to other industries may not be justified, but in my experience, when a competitor announces a less expensive way to do something, the competitors in the industry are VERY, VERY interested in learning HOW this was done and why they missed it.
Patents will be searched, conference proceedings will be scanned, industry documents will be searched (such as SAE technical papers) because managers at competitive companies will want to know about the new alleged technology and how it could help their bottom lines.
Perhaps competitors would want to license the technology, if judged worthwhile.
Furthermore, as part of due diligence, I’d argue that industry competitors would go to a VW dealer and buy a VW diesel vehicle and run it through their OWN test facilities. Spending 30 to 50K for a device to test is insignificant for a large company’s R&D budget, especially when it may verify there is a less expensive way to solve a technical problem.
This causes me to suspect the VW competitors knew VW was cheating and did not report it to the authorities.
The scandal may involve more than VW.
Thanks for this great explanation. Happy to have your clear thoughts in the comments.
>And these incredibly wealthy people are willing to cheat to get even wealthier and they’ll do so even if they have to kill people.
Money is a weird thing, isn’t it?
If money is a score card, one would consider the larger game is a weirder thing ….
It alone has no marginal disutility — which is part of why orthodox economics is a shambles
Nice summary, VOISLAV. Another solution VW rejected was the fitting of smaller urea tanks – since such tanks would have required refilling inside the current service intervals and this was considered a big downer for sales.
The European Comission is now accusing VW, Daimler and BMW of collusion between the companies to limit improvements in car emissions from 2006 to 2014. It is said that the fine to be imposed could reach 10% of incomes during those years.
This is apart from the on course dieselgate investigation aimed only at VW.
Thanks for the added background. I have always strongly suspected that German and EU regulatory agencies and politicians have also been party to this cheating – turning a blind eye for years and keeping it quiet (until they couldn’t anymore). But so far I’ve never heard the question so much as raised, “What did the authorities know?” We’re always hearing in the US how the Europeans are so far ahead of us on environmental science/tech and law. But the diesel cheating wasn’t a little fudge here or there, it was massive. And if I recall correctly it was initially caught in the US by the most rudimentary kind of observation by university researchers. German and other EU govt. authorities with all their environmental bureaucracy really had no idea that their automakers (and it was not just German manufacturers ) were rigging their engine control software to cheat on standard tests in the US and Euroland? I find that hard to believe. That they didn’t want to know is easy to believe, but even so, their own testing regimes would have made it very difficult for awareness of the cheating to be avoided.
Also, Black’s explanation “that it was cheaper” might be considered accurate if you take it to mean the overall system – not just the engine. By system I mean the chosen fuel plus the car. There’s a lot more diesel to be had from a barrel of crude oil than gasoline. Diesel is traditionally less expensive to refine (low sulfur requirements for diesel fuel have narrowed the difference recently no doubt). In that way, it is cheaper, more efficient and more profitable (because lower productions cost to the oil co.s) for a country’s vehicle fleet to run on diesel vs. gasoline. The greater involvement in European govt.s industrial policy could be implicated as a factor here. The regulatory preference for diesel was widespread and even extended beyond the public realm to rules of private associations governing motorsport. ( for example rules hobbling gasoline engines which ensured diesel engined prototype Audis and Peugeots would prevail over and over in the 24h Le Mans endurance race – a kind of pro-diesel propaganda stunt.) Obviously oil companies based in the US also get to have their wicked way with our govt. too. But in Europe the coordination between govt and different industrial sectors is tighter, or at least that’s the general picture we have in the US.
Government ministers with a mandate to bring ordnung to national and EU wide industrial policy might be expected to prefer the overall cost effectiveness of diesel powered autos for their oil co.s and the health of their carmakers over the health of their air. If it turns out to be true that there was a longstanding conspiracy of silence between European govenrment and industry to ignore diesel pollution, that will give many of us in the US who often long for a more rationally planned economy -but also a healthy ecology- something unpleasant to ponder.
I wonder, whether in the current regulatory environment couls be other sectors cheating. In energy efficiency is too easy to detect I guess. Anyone could do it at home.
Move along folks, nothing to see here.
We won’t discuss the $1.5 billion Clinton threw down the Detroit hole trying to develop a “clean diesel” engine. Of more interest is the 1998 “consent agreement” EPA signed with seven major heavy duty diesel engine producers that installed devices to defeat emission controls in violation of the Clean Air Act. These engines were required to have “NOx precipitators” which were to minimize NOx (knocks) during engine travel. The companies comprised 95% of the US heavy duty diesel market .
These “defeat devices” are yet another demonstration of both American ingenuity and a “how to” on instituting corrupt practices with relative impunity. In another instance of black comedy the agreement states, “The consent decrees filed today confirm that no one can violate federal environmental laws with impunity.” Of course nobody went to the can. It may well have been an early executive roadmap for the frauds and scams of GFC.
“… which were to minimize NOx (knocks) …”
Are you giving us the pronunciation, or conflating oxides of nitrogen auto emissions with detonation?
Apologies…that’s the pronunciation.
This is just the tip of the iceberg. I love it when Bill Black laughs at scammers. This one will stretch to include our companies and cause big enough problems that maybe all will be forgiven if car manufacturers promise to change their ways. The intent of the fraud was absolutely blatant. And it’s going to make it impossible to trust them and, silver lining, we’ll get some enforceable regulation. I think I’m going to invest in bicycles in the meantime.
The brazen, hardly even making token attempts to hide it, flouting of EU Directives by Germany aimed at fostering ecological improvements — and the nudge-nudge wink-wink acquiescence by the Court of Justice of the European Union was wot did it for me, in the end, to turn me from europhile to euroscepticism.
Not just, as here, on emissions but more subtly and thus more corrosively also on trying to bluster and prevaricate over fundamental underlying technologies which vested big business interests have (the problem to be fair to Germany isn’t confined to just Germany) made big investment in but now find that investment is rendered wasted as someone else has gained a technical advantage over. US chemical giants like DuPont and Chemurs plus Japanese ones such as Daikin have spent big on low Global Warming Potential (GWP) refrigerants. R1234yf is a high efficiency low operating pressure refrigerant for comfort applications and was developed as an alternative to R134a, which is a first generation chlorine-free refrigerant that has zero Ozone Depletion Potential (ODP) but a huge GWP. R1234yf is a second generation zero ODP refrigerant that also has virtually zero GWP, too. But it requires a redesign of A/C components and licence fees payable to the manufacturers of these and also the refrigerant blend.
Well, Mercedes Benz decided it had too much tied up in the existing systems and engine / engine ancillaries designs. So it got all the air cover it needed from the German government to flout the mandatory phase out of high GWP refrigerants. The automaker and the German government dragged the case out for years and eventually the CJEU imposed a slap on the wrist fine and, unbelievably, made the plaintiff pay half the costs of the case http://www.r744.com/articles/8596/eu_court_partly_rules_against_germany_in_mobile_ac_case pour décourager les autres. The CJEU ruling actively encourages governments to dish out waivers to miscreant businesses on spurious “public concern” grounds.
I’m no fan of US and Japanese chemicals conglomerates, but here they were trying to produce new products that offered a better ecological trade-off than the previous ones. Eco-virtue-signaler extraordinaire Germany doesn’t hesitate to call in favours from friends in high places when its industrial Crown Jewels are threatened. Unfortunately those friends are equally happy to take their calls.
This does not, needless to say, promote good behaviour.
Germans are “mythically” supposed to follow the rules as sacrosant. That myth is fallen.
Of course we follow the rules. To the letter. And we (ab)use large quantities of letters for our rules.
But everyone working with large rule sets knows that large rule sets equal vast quantities of loopholes. Which, i suppose, is exactly why our tax system is as it is.
I will leave it to more learned NC contributors to determine what this German gaming of emissions systems may or may not say about their influence over the ECB.
Certainly this paper is damning in that regard:
Just to add a bit more, the emissions cheating in Europe has a long history and much of has been legalized through regulatory capture. It’s been known for about 10 years before the cheating scandal broke out that the automakers were cheating emissions regulation, as the roadside air quality has not improved since 2006 despite the mandated drop in NOx emissions of more than 70%. So environmental groups knew something was up, it just took time to conduct testing and figure it out.
An example of regulatory capture is the gaming of the urea system. Under normal conditions, urea mist is sprayed into the exhaust system to eliminate NOx. As this is water solution, it will freeze in low temperatures, so automakers are granted cold weather exception, where they are allowed to deactivate the system when temperature is below certain point (usually 2 degree C) and produce much higher emissions. But if you are well connected, you can get exemption for a higher operating temperature. This was done by on many German manufactured vehicles. The most brazen one I’ve seen was for an Opel vehicle which had the exemption for operating temperatures below 19 degree C. PSA group, which recently acquired Opel from GM was really pissed to discover that the main reason they acquired the company, diesel engine expertise, is a mirage that is based on various legal and illegal fixes.
This is a whole industry that is based on lies of being able to meet low emissions and high fuel economy requirements. This is true for both diesel and gasoline engines. The gasoline engine cheating is just as widespread, it’s just harder to catch. As the new round of regulations comes into effect (Euro VII for example), there is going to be a whole new wave of scandals because the industry has no solutions to increase fuel economy while lowering emissions.
Thanks for the valuable info!
Thank you voislav. This answers lots of puzzles, especially the roadside emissions going higher instead of lower after 2006, and overall CO2 doing the same. Those increased stats were so defeating it was hard to believe. And the other take away is that since it is impossible for our best and sneakiest auto engineers to address this problem in a manner that maintains profits (always a hitch) it now, by default, makes EVs a much better choice. There will be much less, maybe none?, roadside emissions from this industry. Those emissions will be coming from a smokestack that can be monitored and hopefully scrubbed or sequestered. I appreciate your info. I have to get something new to get around town. I don’t like to drive on the highway anymore; so a very small car and/or EV bike is my choice.
Unbelievable that this piece goes through the vile, despicable VW leadership who would let such a thing happen; then take a 180 turn and blame the prosecution on Trump and his desire to take down VW because of trade.
I guess in the liberal media, Trump is guilty of everything; innocent of nothing.
If Trump were consistent in his attacks, there could be no controversy.
Trump is called out because of his inconsistency, or because of his picking favorites.
Such as expressing remorse at 70,000 or more dead in Yemen.
Does the US have Foreign Policy or Foreign Palsy?
Not so much a U-Turn Deplorable, more a slight detour to answer why what at first glance might appear to be a concern about illegal activity motivated the President. And, of course, that was not the case. Law-of-the-Jungle trump just saw weakness and pounced.
Cheating is inherent in the monopolized global economy. Today’s bottom line is quick and dirty profits and bonuses. The hindrance is the law and regulations. Initially the system was gamed to inhibit competition but with consolidation and supranational trade treaties, rules became secondary and were by-passed by regulatory managers and technical kluges with C-suite complicity. With pay to play, stay out of jail cards, media silence and regulatory capture, the wide spread corruption has been hidden. The problem is that reality bites back. The exact same thing happened with the 737 Max but the killing of 346 people was instantaneous not deaths of despair spread over decades. Boeing has the same problem as VW. It can’t win back trust because the design is so bad. Canada wants Simulator Training, so the pilot and first officer are able work together under stressful conditions to keep the plane flying if any of the two trim control system sensors go bad again which they will. The FAA said an hour on an iPad is enough.
The only reforms that will work is jail time for executives and restoring government regulation of corporations.
Voislav clearly knows what he is talking about and has covered just about everything, I would only add that Diesel produces less CO2 than petrol so banning diesel will lower NOx but increase CO2. Having said all of that, the cleaning systems are actually not too bad (just not good enough) – one mildly amusing fact is that the air in some parts of the world, India, China, Mexico is so bad, that the exhaust of a diesel truck is more healthy to breath than the atmosphere – now that is a problem.
“….had been using illegal software to pass emissions tests even though the engines themselves continued to admit noxious gases. ”
minor copy edit: I’m pretty sure he means emit noxious gases.