This week German prosecutors announced that they had launched an investigation into the former Chief Executive of Volkswagen (‘VW’) concerning allegations of fraud in the sale of cars with manipulated emissions data. The investigation follows revelations that US Regulators discovered the car manufacturer had fitted diesel cars with software that could enable the vehicles to reduce the levels of nitrogen oxide they emitted when subjected to routine emission test conditions. VW has said that 11 million vehicles worldwide had been fitted with the software and €6.5billion (£4.7bn) had been set aside in anticipation of a wave of global litigation. VW has suggested that 1.2m cars in the UK are affected.

Against this backdrop, what criminal fraud offences could have been committed by the company and its directors or employees in the UK?

Fraud by false representation

The Fraud Act 2006 created an offence of Fraud by False Representation. The offence is committed when an individual communicates a fact to another person, which they know or suspect to be untrue or misleading, with the intention of making an economic gain or exposing another to a risk of economic loss.

The offence may therefore have been committed in circumstances where VW, through promotional literature or its employees, told customers that its vehicles met European Union exhaust emissions standards knowing that this was untrue. A prosecutor would seek to argue that customers would not have considered purchasing the vehicles if they knew that they did not in fact meet emissions standards. This could be done by obtaining witness statements from customers to this effect. In this way it could be shown that false representations had been made to customers with the intention of VW selling a car (a financial gain for VW) or the customer purchasing a car which they would not have otherwise have wished to buy (a loss to the customer).

Presumably, however, VW and its employees will not generally be involved in the direct sale of vehicles. It will do so through a network of dealers, who are likely to be third party franchised businesses. The dealers will be far removed from any involvement and knowledge in the engineering decisions taken when manufacturing the car (including the decision to install emissions software). A prosecutor may have difficulties therefore in proving to the criminal standard that a customer decided to purchase the vehicle on the basis of what they had been told by VW, or its employees, rather than on the basis of what they had been told by a dealer.  The dealer is likely to have honestly believed the vehicles he was selling met the necessary emissions standards.

Conspiracy to defraud

Despite the introduction of new fraud offences which were meant to be comprehensive, the common law offence of conspiracy to defraud was preserved. This broad offence is committed when two or more individuals dishonestly agree to pursue a course of conduct which would, if carried out, cause unlawful prejudice to another person. The prejudice need not be financial. It could involve prejudice to a person’s proprietary rights or prejudice arising because the victim is deceived into acting in a different way from that in which he would have acted had he known the true position.

Lord Denning explained that the offence “…is not limited to the idea of economic loss, nor to the idea of depriving someone of something of value…If anyone may be prejudiced in any way by the fraud, that is enough.”[1]

Before passenger cars can be approved for sale in the UK they must meet certain standards for exhaust emissions set by the European Union. The Vehicle Certification Authority (‘VCA’) is the designated UK authority for assessing whether these standards have been met.

The offence would be committed if two or more directors and/or employees of VW dishonestly agreed to the installation of emissions software in VW cars which would unlawfully induce the VCA to approve a vehicle for sale, or award the vehicle a particular emissions standard, which it would not have done but for the misleading emissions data. The VCA’s duty to fairly and efficiently to regulate vehicle exhaust air quality would be prejudiced in such circumstances.

This offence would be attractive to a prosecutor because it avoids all the tricky evidential issues concerning whether anyone was falsely induced to buy a VW car and whether anyone suffered economic harm. Similar to the original cartel offence created by statute in 2003, this offence is committed at the point in time when a dishonest agreement is hatched.

Prosecution of the company

The offences of fraud by false representation and conspiracy to defraud can be committed by a company when the criminal conduct of its directors or employees in the course of their employment can be attributed to the company. This test of attribution concerns whether an individual(s) was a “directing mind” of the company such that their actions can be said to be the actions of the company.

Representatives of the company have publicly admitted the use of software capable of manipulating emissions tests, saying that “We’ve totally screwed up” and the company had “broken the trust of our customers and the public”. This generic admission of wrongdoing may represent necessary damage limitation and a good public relations exercise but it provides no insight into who knew what and when. Depending on what the evidence reveals, the company may seek to argue that even if an individual has committed a criminal offence in the course of their employment with the company, they were not a “directing mind” of the company and as such the company has not committed a criminal offence.

Conclusion

In spite of the relatively recent introduction of the new statutory fraud offences in the Fraud Act 2006, the most appropriate offence with which to prosecute criminal conduct arising from the revelations at VW remains the older common law offence of conspiracy to defraud. This war-horse of an offence, which is the principal offence being investigated and prosecuted in all of the SFO’s LIBOR cases, remains the ‘prosecutor’s darling’ for a reason. If the UK criminal authorities took an interest in this matter, any criminal investigation and subsequent trial would focus on determining whether the evidence is sufficient to prove that an agreement was dishonestly made to pursue a course of conduct which caused unlawful prejudice to VCA.

Despite the apparent breadth of this offence, UK prosecutors have recently faced embarrassment by failing to demonstrate prejudice to the alleged victim. The case of R v Evans[2] concerned an alleged fraud by a company on a number of local authorities. The SFO’s case against the company was dismissed because the prosecutor was unable to show that the local authorities would have acted differently had they known what the company intended to do. There had therefore been no deception of the local authority. VW’s public admission that global regulators had been misled suggests that UK prosecutors should not experience the same difficulties in this case.