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I continue my series on why I believe that compliance is at the ‘Tipping Point’ with a discussion of the Volkswagen (VW) emissions-testing scandal and its effect on the greater compliance world. Myself and many other commentators have written about the VW scandal from a variety of angles, which I will not repeat here, except to note that the VW emissions-testing scandal was not a failure of the company’s compliance program but an intentional fraud to evade emissions testing standards for a wide variety of jurisdictions, including the United States. The cost of this fraud cannot begin to be estimated at this point but VW has already lost 40% of its market cap or approximately €15 billion.
VW is now beginning its internal investigation and not surprisingly, it claims to be focusing on a small group of ‘rogue’ engineers who acted outside the knowledge of senior management. Not too surprising folks with their heads on the line would make such a claim. Perhaps that speaks to the true culture of the company. However the reason I think that the VW emissions-testing scandal is data point 3 in the tipping point for compliance goes beyond the company engaging in an intentional fraud and then trying to blame it on the engineers.
Even the Wall Street Journal (WSJ) labeled VW actions as “a scam”. Yet as usually the Financial Times (FT), with a masthead of “Without fear and without favour” was even starker when it stated in its lead editorial of September 26th, entitled “Volkswagen’s deception tarnishes big business”, that “The company has damaged its industry and other large corporations”. It went on to state that the VW scandal is “a corporate debacle as great as the collapse of Enron, BP’s oil rig explosion in the Gulf of Mexico and numerous recent banking scandals.” The opinion went on to state, “large companies, such as VW, face a loss of trust.”
In another FT article on the same day in The Top Line column by Companies editor Brooke Masters, entitled “Don’t forget the real losers in all of this fraud – us”, said “Shareholders and customers are the obvious victims of the current flood of bad news.” She also pointed out another set of victims “the employees and shareholders of the companies that try to play fair.” Just as Enron and WorldCom, which were considered to be model companies, were simply massive accounting frauds; the VW scandal may well show that it could not compete on a level playing field.
Further, as large as the scandals cited in both FT articles; Enron, BP, WorldCom and all the others, they did not affect the national brand. No one thought less of US companies because of the Enron and WorldCom scandals or was the UK corporate perception demeaned by the BP disaster, or even the ongoing LIBOR trials in the UK. However the VW scandal has impacted the German auto industry by calling into question the emissions readings of other German manufactured diesel cars not directly connected to VW. Worse yet, the entire German brand of quality and honesty has now been called into question. For if the auto company with the world’s largest sales of autos will intentionally cheat, what else might be going on with other German companies?
It is the last issue that I think makes the VW emissions-testing scandal different than any other previous scandal – it has damaged the German national brand. This may well mean a very aggressive response from the German government in the form of additional regulations and aggressive prosecutions. You can bet your bottom dollar that the US government will have a very aggressive response, in the form of civil penalties against the company under the Clean Air Act and potential individual criminal liabilities, particularly after the hue and cry directed at the US Department of Justice’s (DOJ) lack of individual prosecutions in the General Motors (GM) ignition switch scandal, which according to Master “caused or contributed to 124 deaths in car crashes.”
Even with these potential government responses, I think the VW emissions-testing scandal will be more impactful for the compliance practitioner for a larger reason. As set out in the FCPA Guidance, the reason for an effective compliance program is to prevent, detect and remedy compliance violations. An effective compliance program is the surest way to manage compliance risks for a company. Failures in compliance can lead to fines and penalties and reputational damage to a company. Under the FCPA, corporate third party representatives can lead to liability so companies have responded by managing that risk in a third party management system. Many companies now require any other entity with which they do business to have a compliance program in place.
Yet the VW scandal is so great, broad, wide and all-encompassing that VW’s competitors, for example Mercedes and BMW, have been dragged into it. In other words, these competitors have seen their brands damaged by the VW emissions-testing scandal. This is new territory for many companies. Previously company risk management systems had been designed to protect or prevent a company’s own risk profile. Going forward companies may well have to worry about their competitors’ risk profiles as well.
How can a company protect itself or even respond if a competitor engages in conduct so bad that it damages an entire industry brand? I think the only way is to have an effective compliance program in place. This would also require transparency in compliance throughout the organization. So just as the new DOJ standards as set out in the Yates Memo and scrutiny from the DOJ’s Compliance Counsel will put additional pressure on Chief Compliance Officers (CCOs) and compliance programs; I think that the long-term effect of the VW emissions-testing scandal will be to put greater pressure on compliance programs to do the three things such programs are designed to do; prevent, detect and remedy.
In connection with the DOJ’s new compliance counsel, Stephen Martin said the following, “For companies, the “return on investment” is clear…the benefits of an effective compliance program far outweigh the costs of the program and help mitigate government enforcement and compliance related risks. For compliance professionals, the DOJ’s increasing focus provides the rationale for helping companies truly move to instituting and maintaining a practical, best practices compliance program that meets the rising expectations of the DOJ.” I believe this is even more so after the VW emissions-testing scandal and I would add the rising expectation of the public the companies stop trying to cheat their way to the top. Cheating to win in business does not enhance shareholder value in the end. Moreover, it is through having a robust compliance program in place and being able to demonstrate [Document Document Document] the results to regulators or other interested parties, that companies will be able to protect their reputations going forward from their competitors missteps; intentional or unintentional.
Stay tuned tomorrow for the next data point in Compliance at the Tipping Point.
Visit FCPA Compliance and Ethics, hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.
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© Thomas R. Fox, 2015
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