Tough questions about government settlements

Kyle Burgess

When Michael Horn, head of Volkswagen Group of America, testified before a congressional subcommittee earlier this month, he had to answer difficult questions about his company’s deceptive practices on emission tests. What did he and other executives know about the “defeat devices” installed to trick the Environmental Protection Agency, and when did they know it? What will they do to solve the problem? Why should consumers and regulators trust the company again?

But another tough question needs to be asked of the regulators and government agencies that are investigating Volkswagen. Which do they think is the more serious corporate crime: hiding information from investigators, or endangering — and often killing — customers? Based on the very different penalties imposed on Toyota Motor Corp. and General Motors Co. in recent years, their answer would be the wrong one.

In a settlement announced last month, GM agreed to pay $900 million to the U.S. government for its failure to disclose an ignition switch safety defect. The penalty outweighs GM’s $600 million set-aside fund (with only $93 million actually disbursed) to compensate victims and their families for the death of 124 drivers and passengers (as well as 17 serious injuries and 258 hospitalizations or outpatient treatments) — a tally which excludes deaths and injuries not covered by the fund or under consideration in ongoing lawsuits.

While reports of the faulty ignition switch circulated within GM as early as 2003, the settlement recognizes fault for only the two-year period preceding the installation of GM’s new leadership. Under the deal, the government will likely charge the company only with criminal wire fraud for covering up the problem.

The fine is not tied to profits GM made from the deadly product or to victims’ losses, and the government is charging no individual employees. Prosecution will also be delayed for three years to allow the company to implement changes to its recall process. If the company meets that deadline, the government will not pursue the charges.

In contrast, in 2014 Toyota received a $1.2 billion fine for misleading the public, Congress and regulators about flawed acceleration issues. Yet the consequences of its cover-up were much less serious than in the GM case: five people were killed. Each of those deaths is a tragedy, and it’s impossible to put a price on human life, but common sense would suggest that Toyota’s less fatal, shorter-lived cover-up would draw a lighter punishment.

Why would Toyota be required to pay nearly twice as much as GM for an obviously less significant safety issue? The answer is that the Department of Justice seems to have been less concerned about the number of fatalities than in the level of cooperation. Once the issue came under review, GM cooperated, reached a settlement, and was handled with kid gloves; Toyota did not and was not.

According to the New York Times, “The key message is not in the actual penalty or even the filing of criminal charges, but in how the Justice Department wants other companies under investigation to view the significant benefits realized by G.M. from its cooperation. Prosecutors have promised reduced penalties if corporations take a cooperative stance early in an investigation, and now they can see the tangible benefits in this settlement.”

Translation: Companies whose products kill more consumers will receive better treatment if they make life easier on investigators.

This brings us to the most recent automotive scandal: the revelation that since 2009, VW has been manipulating emissions settings, thereby fooling regulators into believing that the company’s clean diesel engines met EPA standards. The recall covers six models amounting to approximately 482,000 cars.

The company has already set aside more than $7 billion to pay for repairs, fines, and lawsuits. It faces up to $18 billion in fines from the EPA and is also likely to face lawsuits from consumers and shareholders — and the Department of Justice has also started its own investigation.

It already seems likely that, when compared to GM’s deadly deceptions and evasions, VW’s punishment will be grossly out of proportion to its crimes. Its critics will claim that VW threatened public health by producing cars that emitted dangerous levels of nitrogen oxides (as much as 40 times the legal limit), but that is a far cry from the immediate and direct deaths caused by GM’s ignition problems.

Any punishment must teach the right lesson. Car companies should be learning to prioritize vehicle safety and performance over corporate gains. But rather than emphasizing concern for the customers, the government is teaching companies to play nice with the feds.

Kyle Burgess is editor-in-chief of Consumers’ Research magazine.