Volkswagen. Picture: REUTERS/SUZANNE PLUNKETT
Volkswagen. Picture: REUTERS/SUZANNE PLUNKETT

Detroit — Volkswagen is closing in on a deal to pay $4.3bn in criminal and civil penalties to settle a US investigation into the rigging of diesel-powered cars to cheat emissions tests.

The agreement, which VW said on Tuesday would include a guilty plea, raises the cost of the scandal to more than $23bn in the US and Canada, blowing by the €18.2bn the car maker had set aside to resolve the disputes.

The accord would resolve one of the last big obstacles in the US ahead of the January 20 inauguration of president-elect Donald Trump. That will allow the car maker to begin rebuilding its reputation and focus on plans for clean energy vehicles.

"This is good news," Arndt Ellinghorst of Evercore ISI said in an e-mailed statement "The most important news is that VW managed to come to an agreement that allows the company to move on from here. It is a major relief that this does not get dragged into the new US administration."

The draft settlement also called for strengthening compliance systems and installing an independent monitor for three years, the Wolfsburg, Germany-based car maker said on Tuesday in a statement. VW’s supervisory board planned to meet on Wednesday to review the agreement, people familiar with the matter said.

A final agreement must be approved by US courts. The Justice Department declined to comment on Volkswagen’s statement. US prosecutors were planning to charge high-level VW executives based in Germany, a person familiar with the matter said.

US authorities in 2015 uncovered the car maker’s efforts to deliberately cheat on emissions tests on diesel vehicles. The rigged engines were ultimately installed in 11-million vehicles worldwide, and cost former CEO Martin Winterkorn his job.

Bridge loan

VW said the US settlement was likely to result in a further $3bn provision in 2016 fourth-quarter results, which would be treated as exceptional. The car maker extended a €20bn bridge loan facility to mid-2017 to provide an additional financial cushion and protect its credit rating. The company had net liquidity of €31.1bn in the automotive division at the end of the third quarter.

Separately, Porsche Automobil Holding, the investment vehicle of the Porsche and Piech billionaire families that controls 52% of VW’s voting stock, said the settlement would hurt its financial performance.

VW still faces investor lawsuits in the US and in Germany, as well as consumer lawsuits and a criminal investigation in Germany. The company did not say in its statement whether additional individuals would be charged or plead guilty. At least one employee is facing charges in the US and another has already pleaded guilty related to the scheme.

Oliver Schmidt, the company’s liaison with US environmental regulators, was arrested on Saturday in Florida and is scheduled to appear in court there again on Thursday.

Co-operating defendant

VW engineer James Liang pleaded guilty in September in Detroit federal court to conspiring to defraud US regulators and consumers. Liang, who spent 25 years with Volkswagen in Wolfsburg before moving to the US in 2008, was involved in creating a defeat device so cars with 2.0l diesel engines could pass emissions tests.

Volkswagen’s shareholders have suffered since the scandal began in September 2015. Shares are down more than 10%, although they have rallied from a low of €95 to close on Tuesday at €148.10 in Frankfurt trading. The Justice Department was said to have taken into consideration how much the car maker could afford to pay in calculating its penalty.

Shares of VW’s American depositary receipts gained as much as 0.7% and closed at $31.46 in New York trading. On Monday, the stock surged 4.3%, the most in seven months.

Takata negotiaions

Takata is also in advanced negotiations with the Justice Department to resolve allegations of wrongdoing related to defective airbags, although a settlement has yet to be reached, people with knowledge of the discussions said. The resolution would probably involve a financial penalty in the hundreds of millions of dollars and could include criminal charges against the company, the people said.

Volkswagen’s payout for settlements is the largest for a car maker in the US

Toyota spent more than $2.8bn in settlements with consumers and the US following the recall of millions of vehicles over unintended acceleration concerns.

That included a $1.2bn resolution with federal prosecutors of the criminal investigation, but did not include the total paid to accident victims.

General Motors has spent $2.1bn so far for faulty ignition switches, including $900m to resolve the US criminal investigation. Neither Toyota nor GM pleaded guilty to a crime.

The car maker agreements are eclipsed by the $38bn BP has spent so far to resolve government investigations and claims over private property and economic losses related to 2010 Gulf of Mexico oil spill.

Settlement pressure

Under orders from the federal judge to fix about 560,000 cars equipped with defeat devices or get them off the road, VW reached a series of US agreements last year totaling $17.5bn. The pressure on government officials to reach a deal increased with the election of Trump, who is expected to move quickly to deregulate the energy industry and scale back the role of the Environmental Protection Agency.

It first agreed to pay up to $14.7bn to resolve claims involving about 480,000 vehicles with 2l diesel engines. In October, US District judge Charles Breyer in San Francisco gave final approval to that deal, which included buying back the cars from owners plus $2.7bn for federal and state regulators and $2bn towards investment in clean technology.

VW also reached a $603m agreement with California and 43 other states over violations of consumer-protection laws. Still pending are separate lawsuits by states including New York claiming violations of environmental rules.

Dealerships, Canada

VW also agreed to pay $1.2bn to franchise dealerships in the US and C$2.1bn ($1.6bn) to resolve consumer and regulator claims in Canada.

In December, VW reached a $1bn preliminary settlement covering about 83,000 models with 3.0l engines. Breyer set a January 31 deadline for VW to file the settlement, which calls for buying back or fixing the vehicles.

Bloomberg

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