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Volkswagen's diesel tax breaks could be a focus for U.S. prosecutors

By Ayesha Rascoe and Joel Schectman

WASHINGTON (Reuters) - Volkswagen's (VOWG_p.DE) push to secure tax breaks that kick-started a market for its new diesel cars could now help U.S. investigators build a case against the automaker for deceiving the government about their emissions, lawyers said.

VW was among several automakers that lobbied the administration of George W. Bush to secure around $50 million in tax breaks under an incentive program that included the first wave of VW Jetta TDI drivers in the United States.

Around 39,500 customers bought 2009 year VW vehicles eligible for the $1,300 rebate, according to the research firm Autodata Corp.

VW's campaign to get those rebates could open a claim for civil penalties or criminal charges against the German automaker or its executives, according to lawyers who are outside both the developing U.S. investigation and the company’s response but familiar with complex public prosecutions.

VW spokeswoman Jeannine Ginivan said the company had no immediate comment.

VW said last week that it equipped 11 million of its vehicles with software that had the effect of causing the diesel cars to run cleaner during testing by regulators than they did in actual driving.

U.S. prosecutors would need to show that VW executives intentionally made fraudulent claims about their cars' emissions as part of the effort to win the tax break, the lawyers said.

Prosecutors could bring a criminal tax fraud case against VW and charge executives if authorities are able to show individuals intended to trick U.S. authorities, said Scott Michel of law firm Caplin & Drysdale.

U.S authorities also could bring a claim under the False Claims Act -- a law that prohibits lying to authorities to obtain a government benefit, said Aaron Katz, an attorney at Ropes & Gray.

In such a case, authorities could seek to have VW pay back as much as three times the money received by its customers in tax incentives, plus $5,000 for each buyer, he said.

A maximum penalty for False Claims Act violations would be unlikely in a negotiated settlement, Katz said. On the other hand, those penalties represent only one portion of the charges prosecutors could pursue against VW for allegedly deceiving the public and regulators, Katz said.

VW, which has set aside about 6.5 billion euros ($7.3 billion) in the third quarter to cover costs related to the scandal, is not without potential defences, other lawyers say. Environmental law experts say that so-called defeat devices – software used to override emissions controls – can sometimes be installed for legitimate purposes.

Automakers sometimes install such devices to allow vehicles to be tested under differing standards required by overseas regulators, said Bruce Pasfield, a former environmental prosecutor, now at the law firm Alston & Bird.

The U.S. Department of Justice has said it is investigating the emissions-test rigging that VW has admitted to environmental regulators but has declined to comment further.

The U.S. Environmental Protection Agency, which has barred VW from selling new diesel models in the United States until a fix has been approved, has said it could impose penalties on the company of up to $18 billion. In a note issued on Monday, Bernstein Research analyst Max Warburton said the EPA was likely to impose a fine of $7 billion in an "absolute worst case."

The DOJ has said the two agencies are working together on the investigation.

VW said it had installed the rigging software starting in its 2009 diesel models, which were the cars that qualified for the new U.S. tax break. It remains unclear who approved the emissions cheating at VW, or when senior executives became aware, all key questions for any legal case.


The Energy Policy Act of 2005, signed by Bush, expanded a green vehicle tax break to include so-called “lean burn” vehicles like certain diesels for the first time.

The concession represented the culmination of a years-long effort to rehabilitate the reputation of diesel-powered cars. Although diesels represent about half of the European market, Americans had come to associate them with smog and clunky acceleration from a failed rollout of such cars in the 1970s and 1980s, according to records and people involved.

As part of its effort to win the tax subsidy, VW took some of its new “clean diesel” vehicles to Capitol Hill in 2005 to offer lawmakers test rides.

The pitch by VW and other advocates was that diesel technology had evolved to the point that cars could meet tough U.S. emissions standards and contribute to energy savings.

By 2005 the diesel lobby had won over Bush, who said then that the new technology would allow consumers to travel farther on each gallon of fuel, "without the smoke and pollution of past diesel engines."

Four years later, VW had two new models – the Jetta TDI and the Jetta SportWagen -- that the Internal Revenue Service certified were eligible for the tax credit.

Congressman Joe Barton, a Texas Republican who played a major role in getting the Energy Policy Act approved in 2005, told Reuters that VW should face "severe economic consequences" if it was found to have deliberately misled authorities.

"We need to look at the tax credits," he told Reuters.

Daimler AG's (DAIGn.DE) Mercedes was the only other carmaker to receive the tax credit. There is no evidence of emissions cheating beyond VW.

The Diesel Technology Forum, an advocacy group that counts VW as a member, said the VW case does not discredit the potential for diesel as a fuel-saving technology.

“The circumstances involving a single manufacturer do not define an entire technology, or an industry,” the group said in a statement.

(Additional reporting by Susan Cornwell; editing by Kevin Krolicki and Stuart Grudgings)