VW digs a deeper hole

AUBURN HILLS, Mich.–Long before Volkswagen AG's emissions-cheating scandal erupted, the German auto giant withheld information from regulators in the U.S., according to internal documents.

In 2004, the auto maker's U.S. environmental-compliance employees alerted their bosses in Germany that they believed that Volkswagen needed to tell regulators about a faulty emissions part. The Germans' response: don't.

Dozens of cars from Volkswagen's Audi NSU unit were returning to U.S. dealers with a broken sensor that could affect emissions in gasoline-powered engines. The number of defects triggered a legal requirement to include the part in mandatory reports to regulators, U.S. employees said.

But after an employee listed the faulty part, called an exhaust-gas temperature sensor, or EGT, in a draft report to California regulators, an Audi official in Germany called for a revision. "Delete the EGT," Audi's Bernhard Grossmann wrote to Norbert Krause, the U.S. employees' supervisor, in an email reviewed by The Wall Street Journal. Mr. Krause responded two days later: "The EGT is out."

Mr. Krause said he doesn't recall the exchange. Mr. Grossmann said: "This all happened 11 years ago and that's a long time. I have nothing to say about this."

Volkswagen declined to comment on the events. An email that a Volkswagen official sent to its U.S. office in late 2004 stated that the part wasn't important enough in the emissions system to disclose to California.

The previously unreported episode, detailed in internal documents the Journal reviewed, shows Volkswagen shielding details of an engine part more than a decade before it admitted to hiding an emissions device on more-recent models. That recent admission has triggered global probes, lawsuits and significant upheaval at the German industrial giant: Its chief executive was forced out, recent sales have fallen–up to 25% in the U.S. last month–and it set aside $7.3 billion to finance the cost of fixing tainted engines.

On Tuesday, a U.S. judicial panel sent hundreds of lawsuits against the auto maker to a federal court in San Francisco.

Volkswagen has acknowledged installing illegal software on nearly 500,000 diesel-powered cars sold in the U.S. since 2008 that allowed those vehicles to pollute more on the road than during government tests. It later said the software was on nearly 11 million vehicles globally, triggering wide-ranging investigations in Europe and Asia.

The EGT predates the diesel-engine woes and represents a separate potential disclosure issue. There isn't any evidence it affected government emissions tests. Volkswagen in federal filings failed to tell environmental regulators the EGT part even existed. It omitted the part from federal applications seeking government approval to sell cars in model years 2001 through 2004, despite laws requiring parts affecting emissions be disclosed, government filings show. In federal certification applications for other cars that have the part, Volkswagen disclosed it as an "auxiliary emission control device."

Whether Volkswagen disclosed the part in other Audi vehicles with the same engine containing the disputed EGT before the 2001 model year isn't clear. The U.S. Environmental Protection Agency hasn't yet provided documents for those model years to the Journal in response to an open-records request.

Volkswagen's failure to disclose emissions components has been at the heart of the company's current crisis. After regulators revealed cheating software, called a defeat device, in September, Volkswagen withdrew applications to sell 2016 diesel-powered vehicles after admitting it omitted a separate emission-control device.

The EGT that Volkswagen concealed in 2004 isn't a device that dupes emissions tests. The part protects the engine's turbocharger by telling the car's computer to cool the exhaust if it gets too hot, a process that alters a fuel-air mixture designed to minimize emissions.

It isn't clear why Volkswagen didn't disclose the part or why it withheld it from the defect report to California officials. A Volkswagen official at the time indicated the part wasn't relevant to emissions.

Mary Nichols, head of the state's Air Resources Board, when asked in November what her reaction would be to discovering Volkswagen removed the sensor from a California defect report, said: "That would be a huge issue. I would be very disturbed about that and would think it was cause for a much bigger investigation." The California Air Resources Board regulates Volkswagen and is probing the car maker's more-recent emissions lapses.

The 2004 removal of the EGT from the defect report occurred while Volkswagen's Mr. Krause was negotiating an eventual settlement with the EPA over a different disclosure issue that led to a June 2005 agreement in which Volkswagen pledged to improve such disclosures without admitting to the violations regulators alleged.

If federal officials were to investigate the EGT disclosure and find the part wasn't properly reported, Volkswagen could face penalties of up to $37,500 per car sold with the component. The company sold more than 3,900 of these engines before production was halted about 2004, internal records show, placing the maximum possible fine at more than $140 million.

Mr. Krause, now retired, says he doesn't remember efforts to remove the EGT from a defect report to California in 2004, when he headed Volkswagen's U.S. environmental and engineering office.

"It was 11 years ago. I can't remember this case," he said. He said Volkswagen often discussed regulatory issues internally, including with colleagues in Germany. "Sometimes it was a big discussion. Sometimes it was pretty clear" what to do, he said. "We as VW of America were responsible for the reports" to regulators.

The EPA referred questions about the removal of the EGT from the California defect report to CARB, which declined to comment beyond Ms. Nichols's earlier remarks. As for whether the part should be disclosed in U.S. certification applications, an EPA spokeswoman said: "If the control system changes the air-to-fuel ratio of the engine in response to a signal from the EGT, that system would be an [auxiliary emission control device] and the EGT itself would then be an emission-control component." She added that U.S. law requires "a detailed justification of each AECD that results in a reduction in effectiveness of the emission-control system."

Under U.S. law, an auxiliary emission control device is "any element of design which senses temperature, vehicle speed, engine RPM, transmission gear, manifold vacuum, or any other parameter for the purpose of activating, modulating, delaying, or deactivating the operation of any part of the emission control system."

In 2000, Audi filed an application asking the EPA to certify a gasoline engine with two turbochargers, which use exhaust gas to turn fans that increase engine power. Volkswagen engine-repair manuals and internal documents show the engine had a sensor to alert the car's computer if exhaust temperatures were rising high enough to damage those turbochargers.

In that case, the computer cools the exhaust by increasing the ratio of fuel to air entering the combustion chambers. That ratio is normally calibrated to minimize tailpipe emissions. Adding more fuel can cool exhaust and protect the turbocharger but undoes the settings meant to limit emissions.

"Any type of part that impacts emissions, you need to disclose that in your certification package," said Richard Alonso, a former EPA enforcement lawyer now at Bracewell & Giuliani LLP. "If it's installed on the vehicle but not disclosed, then I believe EPA would find that's a violation of law."

For such penalties, a general U.S. five-year statute of limitations applies, Mr. Alonso said. But the EPA often tries to extend that period by arguing that withholding a part from a certification application is an ongoing violation as long as cars remain on the road. Regulators also sometimes contend concealing such information amounts to fraud, so the five-year clock doesn't begin until the government discovers the transgression, he added.

Dennis Reineke, a retired Volkswagen official who signed the 2000 Audi certification application, said he isn't sure why the EGT wasn't disclosed. Typically, certification filings were "prepared in Europe by the German certification engineers" and sent to U.S. staff who completed them for the EPA, Mr. Reineke said. U.S. staff didn't review the German information to ensure every emissions component was disclosed, he said.

Mr. Reineke said he doesn't recall discussing the EGT in the course of filing the application, but "vaguely" remembers the "discussions over whether it was an emission-related part or not" among colleagues responsible for reporting defects.

Under California law, car makers must file quarterly reports to regulators about defective emissions parts. U.S. and German Volkswagen employees disagreed on whether to remove the EGT from the California defect report more than a decade ago, internal emails show.

The turbocharger EGT sensor isn't "emission relevant," wrote a Volkswagen official in Germany, in a Nov. 4, 2004 email to Michigan employees. That official couldn't be reached for comment. "Cancel this item" from the draft California report, he added.

The next day, a U.S. employee disagreed, writing: "California ARB regulations require" disclosure. Moreover, the employee wrote, Volkswagen had listed the part on a separate, earlier emissions-defect report filed earlier that year with California regulators. Removing it could get more attention than leaving it on the report," the employee wrote.

The German Volkswagen official responded two hours later. "I have discussed temp sensor issue with Norbert," he wrote, referring to Mr. Krause. "We have agreed this will no longer be in the [report] to California."

The next week, Mr. Grossmann, the Germany-based Audi official, told Mr. Krause "to delete" the EGT from the report to California regulators. "Der EGT ist raus"–"the EGT is out"–Mr. Krause responded two days later.

The defect disappeared from the subsequent report. Volkswagen didn't disclose the defect to the EPA, either. By March 2004, nearly 200 Audis had faulty EGT-sensor claims, above the 25 cases that trigger legal requirements to report defects to U.S. regulators, internal Volkswagen documents show.

An EPA spokeswoman said failing to file a defect report when an auto maker knows of more than 25 examples of a defective component from a single model year would violate U.S. regulations if the part is an emissions-related component that needed to be disclosed in an earlier certification application. William Boston, Justin Scheck, Mike Spector and Mark Maremont, The Wall Street Journal.

Leave a Reply