Last month German prosecutors announced a criminal investigation into the former Chief Executive of Volkswagen (‘VW’) concerning allegations of fraud arising from the sale of VW cars tainted by manipulated emissions data. A raft of other prosecutors and regulators have followed suit. This frenzy of investigative action was kick-started by revelations that US regulators had discovered that VW had fitted diesel cars with software that artificially reduced the true levels of nitrogen oxide they emitted when subjected to routine test conditions. VW has said that 11 million vehicles worldwide have been fitted with the software, including potentially 1.2 million cars sold in the UK. €6.5billion (£4.7bn) has reportedly been set aside in anticipation of a wave of global litigation.
Against this backdrop, what criminal fraud offences could have been committed in the UK? In the media, the scandal has been presented as a clear case of fraud on VW’s British customers, who were seemingly deceived about the true polluting impact of the cars they bought. The majority of civil claims against VW will presumably be brought by groups of these customers. In terms of a criminal case, however, prosecuting the VW emissions scandal as a fraud on the British public would not necessarily be the wisest course of action.
Conspiracy to commit fraud by false representation
The Fraud Act 2006 created a trio of primary offences, including the offence of fraud by false representation. The offence is committed when a person dishonestly makes a representation which he knows or suspects to be untrue or misleading. The representation must be made with the intention of making an economic gain or exposing another to a risk of economic loss. As the offence is committed at the point in time that the representation is uttered, no deception, gain or loss need actually result from the representation. It is not even necessary that the representation in fact be communicated to the intended recipient.
At first glance, this offence would appear to be apposite. One would expect evidence that VW made representations about, for example, the compatibility of the emissions data of its cars with applicable EU standards. Such representations would probably be contained in sales and franchising contracts including information about environmental performance. The offence would apply even if these contracts were entered into with VW’s dealerships rather than direct with VW’s customers (as would ordinarily be the case in a supply chain for car sales), because VW still stood to make an economic gain from selling the cars on the basis of their misleading emissions data, which they might not have been able to sell had the true emission data been known.
However, the problem in prosecuting the offence on this basis might well be establishing an evidential nexus between (a) the person within VW who “made” the representation to the dealerships, and (b) the person within VW who knew that such representations were false. The former is likely to be a sales manager who liaises direct with the dealerships, whereas the latter is likely to be an engineer. If there is little evidence of collusion between them in terms of promulgating knowingly false emissions data through VW’s supply chain, it may be difficult to prove a dishonest conspiracy to commit the offence.
It would probably make more sense if the offence was prosecuted on an alternative basis – and one which does not require any detailed evidence of the supply chain. Before passenger cars can be approved for sale in the UK, production samples must be tested to ensure they meet certain standards for exhaust emissions set by the EU and UN. The Vehicle Certification Authority (‘VCA’) is the designated UK authority for assessing whether these standards have been met. By presenting the production samples to the VCA for assessment to determine whether the vehicles met the applicable EU and UN standards, a prosecutor might well be tempted to argue that VW had made implied representations to the VCA that this production sample was true and would reflect the cars manufactured, i.e. that it had not installed software intended to produce artificial emissions results when the production sample was subjected to the test conditions. The offence is still committed if these representations were made on behalf of VW to a machine (which awarded the emissions standard) rather than to a person.
The fact that a false representation can be implied through conduct is well-established. The principle was reaffirmed recently in the civil context when the Court of Appeal gave two claimants permission to amend their claims to plead misrepresentation by reference to alleged LIBOR submissions made by Barclays Bank and Deutche Bank. The Court accepted that the banks had made implied representations as to the integrity of their submissions.
On its face, therefore, there would appear to be no obvious reason why the conduct could not be charged as a conspiracy to commit fraud by false representation; the conspirators would be those people within VW who knew that the production samples sent to VCA were fitted with the software.
Articles for use in fraud
The Fraud Act 2006 also created the offence of making or supplying articles for use in fraud. The offence is committed where a person makes or supplies any article knowing that it is designed for use in the course of or in connection with fraud or intending it to be used to commit, or assist in the commission of fraud. The Fraud Act 2006 attempted to deal with the increasing use of computer programmes in the commission of fraud by specifically providing that a reference to an ‘article’ includes computer programmes and electronic data.
Again, at first glance, this offence would appear to be tailor-made to deal with VW’s misconduct, in that the software which manipulated the emissions test could be deemed to be ‘article’ for use in fraud. The commission of a ‘fraud’ for the purposes of this offence is defined by reference only to the fraud offences created by the Fraud Act 2006. Therefore, to commit the offence, a person within VW would need to have made or supplied the relevant software intending that it would be used in the commission of, for example, the offence of fraud by false representation. On its face, charging VW’s conduct as a conspiracy to make or supply articles for use in fraud would also be available to a prosecutor.
Conspiracy to defraud
Despite the introduction of a range of fraud offences under the Fraud Act 2006, 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. Unlike the offences under the Fraud Act 2006, the “prejudice” in a conspiracy to defraud prosecution need not be economic. 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.”
The offence would be committed if two or more VW persons 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 emissions software. The VCA’s duty 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 calling evidence as to economic gain or loss, but as explained above, demonstrating an intention to make an economic gain as a result of defrauding the VCA should be relatively straightforward. It is difficult to think of any rational explanation why VW would have installed the software except to make the cars more marketable, and hence to make an economic gain otherwise unavailable to it.
Prosecution of VW or its UK subsidiaries
The offence of 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 it. 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.
When giving evidence to the US Congress, Volkswagen’s US Chief Executive said that the installation of the software was the work of a “a couple of software engineers” and that their actions were unknown to the company’s board. Arguing that criminal offences were committed by rogue employees may represent necessary damage limitation at this early stage. However, the “directing mind” of a company is not limited to members of a company’s board. The criminal knowledge and actions of any servant of a company acting in the course of his employment can be attributed to the company if the construction of the offence requires this and the evidence supports it. In the case of Tesco Supermarkets Ltd. v Nattrassthe company was able to avoid criminal liability for the actions of one of its store managers by relying on a statutory defence that they had taken all reasonable precautions to avoid the commission of the offence. No such defence would be available for a VW company if prosecuted for offences under the Fraud Act 2006 or for conspiracy to defraud.
There have been high-profile recent prosecutions (LIBOR being the obvious example) where prosecutors have charged the older common law offence of conspiracy to defraud in preference to the more modern Fraud Act 2006 offences. Conspiracy to defraud is an adaptable offence that captures a wide range of criminality, and it has the benefit that proving economic gain or loss is unnecessary. However, in the VW emissions scandal, there would seem to be no obvious reason why charging a conspiracy to commit an offence under the Fraud Act 2006 – a conspiracy to commit fraud by false representation or a conspiracy to make or supply articles for use in fraud – should be problematic. Indeed, prosecutors are obliged to consider the Fraud Act 2006 offences in preference to conspiracy to defraud under guidance issued by the Attorney General. In circumstances where VW has already publicly admitted both that it acted dishonestly and that global emissions regulators were misled, and where the 1.2m VW cars sold in the UK have reportedly been tainted by the fraud, one wonders why so little has been said about a criminal prosecution in the UK. At least three criminal offences would seem to be appropriate. And the VCA – a UK entity – would be the victim.