That may well be the line most used by Volkswagen (VW) executives after the arrest of their fellow executive, Oliver Schmidt, this past week at the Miami airport. According to an article in the New York Times (NYT), entitled “Volkswagen Executive’s Trip to U.S. Allowed F.B.I. to Pounce, by Jack Ewing, Adam Goldman and Hiroko Tabuchi, “When F.B.I. agents learned that a prime suspect in the Volkswagen emissions scandal was traveling to the United States, investigators knew they were on the cusp of a rare feat: the arrest of an overseas corporate executive accused of wrongdoing. On Saturday night, agents swooped in to arrest the Volkswagen executive, Oliver Schmidt, as he prepared to depart Miami International Airport for Germany”.

It is difficult to understand the stupidity or arrogance or both of Schmidt in leaving Germany and traveling to the USA while he was under investigation by US authorities. He had previously met with FBI agents in 2015 in London to be interviewed. What is even more surprising it that Schmidt was right in the middle of the company’s attempt to deceive, bamboozle and generally hood-wink US regulators through the company’s defeat devices built into their diesel engines over the past 10 years.

According the Affidavit, unsealed as a part of the arrest process, Schmidt, beginning in 2013, was general manager of VW’s Engineering and Environmental Office in Auburn Hills, Michigan. This made him the top emissions compliance manager for VW in the US, with responsibility for managing relations with the Environmental Protection Agency (EPA) and the powerful California Air Resources Board (CARB), the regulatory agencies that initially pursued the emissions cheating case. In this role, he became aware of the emissions-testing discrepancies in early 2014 “when a study by West Virginia University found evidence that Volkswagen diesel cars polluted far more under normal driving conditions than they did in official testing labs.”

Unfortunately for Schmidt, he took the role of compliance officer not to be comply with the law or even tell the truth but to try and hide facts from US regulators. According to the Affidavit, when he originally found out about the defeat device, Schmidt emailed a colleague at VW, “It should first be decided whether we are honest. If we are not honest, everything stays as it is.” Later Schmidt went from such internal deception to active steps to deceive US government regulators.

But before he began dissembling to the US, he briefed senior VW executives at the corporate headquarters in Wolfsburg on the possible implications of the defeat device. This briefing included not only the possible fines and penalties per automobile but also the notation of possible criminal violations. Schmidt said, “The difference between street and stress test must be explained. (intent=penalty!)”.

Schmidt’s role grew in the summer of 2015 when VW was scrambling to answer more pointed and direct questions from regulators. First he briefed VW executives again on the situation around the existence of the defeat device and the fact that regulators were not yet aware of its incorporation into VW diesel fleet. Schmidt then met with regulators and blamed the testing discrepancies as “technical reasons and excuses such as ‘irregularities’ and abnormalities” rather than tell the truth and admit to the existence of the defeat device. Schmidt followed up after this meeting and continued the VW party line that the regulators discrepancies in testing was related to their faulty testing and not the defeat devices. In short, Schmidt was not trying to comply with the law but actively working to hide and conceal VW’s illegal conduct.

Some commentators have asked what this may portend for compliance practitioners, fearing a wave of criminal actions against Chief Compliance Officers (CCOs) and others. Mike Volkov answered that concern directly in a quote in a Wall Street Journal (WSJ) Risk and Compliance Journal piece by Sam Rubenfeld, entitled “The Morning Risk Report: VW Executive’s Arrest Stirs Compliance Liability Concerns”, where he was quoted as saying, “A compliance officer is not immune from criminal liability: Just like every other executive and employee, if they commit a crime they should be prosecuted.” Addressing the second prong of alleged concern Volkov intoned, “One bad apple should not have any impact on compliance officers who conduct their jobs with good faith.”

The bottom line is that no compliance professional should worry about the arrest of Schmidt. He was not arrested for doing his job, he was arrested for the opposite; doing the job of illegal activities. Yet there are aspects of the matter which do raise some interesting issues. From the indictment, we know there are at least two cooperating witnesses who have been given immunity from prosecution, monikered as Cooperating Witness 1 & 2 in the Affidavit. There is also James Liang, who was previously arrested and is now cooperating with authorities and provided information which was set out in the Affidavit, “in exchange for the possibility that the government will recommend to a court that he serve a reduced sentence.” There was also information in the Affidavit from two of the regulators who were involved in the underlying discussions with VW which led to Schmidt’s arrest.

The bigger problem for VW executives now is the person who allegedly told them about the defeat device as early as 2014 is in jail with a very low likelihood of receiving bail. He does not have much incentive to do anything except cooperate with prosecutors. Even though VW is now reportedly in advanced discussions to plead guilty to criminal wrongdoing and pay a $4.3 billion penalty the matter is still in the late drafting stage. Any settlement with VW would not absolve the executives involved. If the Yates Memo means anything about the Justice Department going after culpable individuals, this would seem to be the case for it.

Yet those other VW executives may well want to consider a home vacation this year. Just as Schmidt found when he traveled to the US, the authorities can arrest you on US soil. As another German citizen Bernd Kowalewski, the onetime Chief Executive Officer (CEO) of BizJet, discovered, if you fly through Amsterdam on your way to a vacation, you may be subject to arrest and extradition to the US. As for Schmidt, he might want to watch multiple screenings of the movie Forrest Gump and focus on one of Gump’s signature lines, “Stupid is as stupid does.”


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© Thomas R. Fox, 2017