Cheating is WrongIn the movie Margin Call, Jeremy Irons intones that there are three ways to win in business: (1) be the smartest; (2) be the fastest; and (3) cheat. I am currently out at the SCCE 2015 Compliance and Ethics Institute and as you might guess the Volkswagen (VW) emissions-testing scandal is a major topic of conversation. One of the more interesting observations is that the VW scandal was not a failure of compliance but an intentional design to cheat emissions standards testing on a worldwide basis.

Columnist Michael Skapinker recently raised this issue in a Financial Times (FT) article entitled “Volkswagen, its software and the psychology of cheating”. I found this article to be a very useful way for a Chief Compliance Officer (CCO) or compliance practitioner to think about how an employee might become in involved in conduct which violates such anti-corruption laws as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

Skapinker identified three general categories of corporate scandals, which he has observed. The first is where the law is unclear and “many who have been testing its boundaries, and those who are finally blamed, fired or jailed either went too far or were selected by prosecutors or regulators to be made examples of”. Skapinker identified the Guinness scandal of 1986, where the company “had offered financial inducements to associates to support its share price”, while the company was in a takeover battle. He also noted, “Some, but not all, accounting scandals fall into this category”.

The second category is where the company actually sells something that either hurts its customers or at the very least does not help them. Skapinker wrote, “The company doing the sell rationalises that it is really up to the customer to decide whether or not they want to purchase the product or services. Many financial services scandals fall into this category but often times, it may involve “outright deception” or what the Wall Street Journal (WSJ), in an article entitled “VW Probe Targets Engineers” is now calling, “a scam”.

The third type of behavior is what Skapinker calls “everyone is doing it” [or what I call the ‘Lance Armstrong Syndrome’] or what I might say is “we’ve always done it that way” excuse. Under this prong, if you do not cheat, it is your company that will suffer because everyone else is cheating so you are really just keeping up. Of course you may cheat better than everyone else (aka Lance Armstrong) but it all revolves around the mentality of which Skapinker says “If we do not do it, when everyone else does…our employees and shareholders will be worse off.” He puts in this final category, things that are possibly legal but “reputation damaging manoeuvers such as routing profits through low-tax jurisdictions to crass immorality such as covering up adverse drug trials and criminal activity such as Libor-rigging and bribe-paying.”

Yet the VW scandal does not fall into any of these categories. Indeed Skapinker says that the VW scandal is “striking in its apparent villainy” as there was certainly no gray area that VW exceeded. He noted, “Devising a system to detect when a car is being tested surely required planning, expertise and specific decision.” Or as Mike Volkov might say, there was intent to deceive. Whatever it was the company did not “drift into [the actions] through incrementally deteriorating behavior.”

The focus of the investigation now appears to be on the senior engineers involved in the defeat device system. William Boston’s, WSJ, article entitled “VW Probe Targets Engineers”, said that the two top company engineers brought in to design an emissions system which would pass regulatory muster have become the focus of the investigation. The company recently suspended them. The engineers Ulrich Hackenberg and Wolfgang Hatz were brought into their positions by the now disgraced former head of VW Martin Winterkorn.

The New York Times (NYT) went further in an article by Jack Ewing, entitled “Volkswagen Engine-Rigging Scheme Said to Have Begun in 2008”, when he wrote the company knew as far back as 2008 that its diesel engines did not meet emissions testing standards. However, “Rather than stop production of the engine and throw out years of work and investment, managers decided to cheat, the people said, confirming a report in Bild am Sonntag, a German newspaper.” As a part of its internal investigation, “After interviewing engineers who participate in engine development, internal auditors have determined that the illegal software was installed beginning in 2008, according to the people familiar with the inquiry, which is still at a preliminary stage.”

What are some of the lessons that the CCO or compliance practitioner might be able to draw from these articles and reports regarding FCPA compliance? Skapinker and his three categories of corporate scandals can be very useful to help identify those employees or those situations that might lead to a high risk for a corruption. Obviously there are places in the world where there is a high perception of corruption but what about places where you are engaged in cutthroat competition? How closely are you looking at indicia that might point to corruption in those locations?

Moreover, are you beginning to see steps towards the edges of the ethical or legal line being taken? This is not directed at the sociopathic employee who does not believe the laws apply to him or her but the employee who moves inexorably out from the middle of the road to the point of kicking dust up on the line of unethical or illegal conduct. As CCO do you have visibility into those commercial activities that might well be moving towards the edges of legality?

As the VW emissions-testing scandal continues to unfold, there will be new facts and new revelations. The lessons will also be more and greater for the CCO or compliance practitioner. However, you may want to use some of this information available to you now to help forestall an issue that might arise later. Think about the other German auto manufacturers and how their reputations have taken a hit from being the same nationality and in the same industry as VW. They will have to prove all of their testing protocols are legal and ethical going forward. You may want to get ahead of the curve a bit on this one.

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© Thomas R. Fox, 2015