The Volkswagen Case: Chaos Theory, Corporate Risk, and Compliance

“The flutter of a butterfly’s wings can trigger a tsunami on the other side of the world” (Edward Norton Lorenz, mathematician and meteorologist known for Chaos Theory, 1973)

It is rare to find a more metaphorical example that manifests itself in such a precise and tangible reality as has been demonstrated in the VOLKSWAGEN CASE.

Colombian researcher Francisco Posada and the team of engineers from West Virginia University, with a budget of 62,000 euros, represent the butterfly.

The Volkswagen Group worldwide, with a minimum estimated cost of 22,500,000,000 euros, represents the Tsunami.

The figures are correct and exact: a research project that cost 62,000 (sixty-two thousand) euros will cause the Volkswagen Group a projected cost of 22,500,000,000 (twenty-two billion five hundred million) euros in fines and compensation alone. This amount may presumably increase in both scope and quantity, meaning that just 1 euro invested in the aforementioned project has transformed into an effective cost of 362,903.2 euros for the Volkswagen Group.

The story of this real and current event, which reveals how investing very little capital can lead to, or, with proper advice, prevent such notable and significant outcomes, begins as follows.

The Technical Background of the Volkswagen Case

The International Council on Clean Transportation (ICCT) of the USA is an independent non-profit organization established under Section 501 (c) (3) of the United States Tax Code that provides technical and scientific analysis to environmental regulators.

After studying and analyzing the report published in 2011 by the European Commission’s Joint Research Center—which warned that emissions levels in real-world driving conditions for motor vehicles on the road in Europe “substantially” exceeded the data collected in the laboratory— decided to verify whether this situation also occurred in motor vehicles on the road in the United States.

The ICCT, a non-profit organization funded by foundations such as Hewlett and Packard, put $70,000 on the table (about 62,000 euros) to determine if diesel vehicles circulating in the USA met nitrogen oxide (NOx) emission criteria. This task was entrusted to Colombian researcher Francisco Posada and the team of engineers from West Virginia University.

The plan consisted of a nearly 4,000-kilometer round trip expedition between Los Angeles and Seattle with 3 vehicles: a Volkswagen Passat, a Volkswagen Jetta, and a BMW X5, all 2012 and 2013 models. A Mercedes could not be added due to budget constraints. Each vehicle carried a silent passenger in its trunk: the PEMS, a device connected to the exhaust pipe capable of recording the vehicle’s polluting emissions while driving, without needing to be on a laboratory test bench.

The project lasted 39 hours and 31 minutes, covering the route at an average speed of almost 101 kilometers per hour. In June 2013, data collection ended, and the analysis phase began.

The ICCT asked the California Air Resources Board (CARB), the state agency that measures air quality in California, to conduct the laboratory tests, while the ICCT and West Virginia University performed the real-world driving tests.

The comparison between the two would indicate if NOx emissions were as different in the USA as in Europe.

Research, the EPA, and Global Impact

Almost a year later, the ICCT presented the research results at a symposium and alerted the US Environmental Protection Agency (EPA): NOx emissions in the Jetta exceeded permitted levels by up to 35 times, by up to 20 times in the Passat, and remained within limits in the BMW.

It should be noted that the ICCT did not detect the software but merely conducted measurements in the laboratory and on the road, compared the results, and reported its findings to the EPA, which, after confirming the data, contacted Volkswagen to inform them that they were exceeding the limits, although there is currently no mention of the existence of an illegal device.

That relationship lasted for a few months, during which they exchanged correspondence and the company made corrections that proved insufficient to meet the standards.

On September 18, 2015, the EPA made the following accusation public: “Volkswagen has violated the Clean Air Act.”

The agency adds the following: “It allegedly used software to circumvent laboratory emissions tests,” estimating that 482,000 vehicles in the United States have had the device installed since 2008.

Hours later, Volkswagen admitted the deception and gave it a global scale: 11 million cars were deceiving authorities with their emissions.

Volkswagen’s U.S. chief, Michael Horn, reacted with a colorful expression to make clear the executives’ state of mind in the face of the problem’s magnitude: “We’ve completely screwed up.”

To address such a problem, Volkswagen has created a fund of 6.5 billion euros.

Added to this situation is the corresponding penalty that the US Government will impose on the aforementioned entity, which is already valued to date at a minimum of 16 billion euros.

And to all this is added the latest event of 11/4/15, consisting of Volkswagen’s acknowledgment of the existence of “irregularities” and “unexplained inconsistencies” in the carbon dioxide (CO2) emissions of approximately 800,000 vehicles in its group, of which 98,000 are gasoline-powered. For this, it has created a fund of 2 billion euros to address this contingency.

In turn, the number of affected brands and vehicle types continues to increase, and as a result of the investigations, the brands SEAT, AUDI, SKODA, and recently PORSCHE have also been implicated, as well as both diesel and the recently discovered gasoline engines.

Consequently, the 62,000 euros that the ICCT project cost, on which the EPA based its investigation and sanction—that is, the butterfly—have become a real and tangible problem for Volkswagen, valued at 22.5 billion euros—that is, the Tsunami.

And to the above is added the brand’s stock market discredit, evidenced by the fact that the company’s shares in the US closed with losses exceeding 5% in a single session, plummeted 9.5% on the Frankfurt stock exchange on 11/4/15 alone, and in terms of sales in October (and therefore prior to the latest statement on the existence of “irregularities” in carbon dioxide (CO2) emissions), with a 0.7% drop in sales in Germany, a 3% decrease in France, and a weak improvement in the United States of 0.24% compared to double-digit growth for its rivals.

In Spain, this situation already has its first direct judicial consequences, manifested in one of the first judicial imputations of a company carried out in accordance with the new Organic Law 1/15 amending the Penal Code, specifically in Preliminary Proceedings No. 91/15 processed by Central Investigating Court No. 2 of Madrid, in which, by Order of 10/28/15, the VOLKSWAGEN GROUP is notified as a legal entity to which a punishable act is attributed, initiating this criminal procedure against it.

The Volkswagen Case, Corporate Risk, and Regulatory Compliance

The Volkswagen case illustrates how a technical, regulatory, and reputational crisis can turn into a global legal problem for a company, its subsidiaries, executives, consumers, investors, and public authorities.

From a compliance perspective, these types of scenarios highlight the importance of having effective internal controls, independent verification systems, reporting channels, oversight of technical risks, and mechanisms for responding to potential noncompliance.

When an organization operates in several countries, with multiple subsidiaries, suppliers, technical teams, and regulated markets, the risk is not limited to internal matters. An irregularity can lead to administrative investigations, criminal proceedings, consumer complaints, reputational damage, and financial penalties.

The Preventive Role of Compliance in Regulated Companies

Compliance programs make it possible to identify risks before they materialize. In regulated sectors—such as automotive, energy, transportation, technology, the environment, banking, consumer goods, and public procurement—prevention must incorporate technical, legal, and organizational controls.

The existence of a compliance model does not in itself guarantee the absence of liability, but it can be relevant in demonstrating due diligence, preventing unlawful conduct, detecting deviations, and responding to violations.

An effective model must be integrated into the company’s day-to-day operations and have the support of senior management, clear protocols, documented controls, internal training, periodic reviews, and investigative capabilities.

Reputation, Consumers, and Corporate Response

In cases of widespread impact, a company’s response is just as important as prior prevention. Communication, collaboration with authorities, customer service, and the implementation of corrective measures can all influence the legal and reputational assessment of the case.

Failure to respond appropriately can exacerbate the damage, lead to a surge in claims, and weaken the company’s position in litigation.

For this reason, in complex matters involving criminal, administrative, civil, and reputational aspects, it is essential to seek legal advice from the very beginning.

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