At What Cost Dishonesty? For VW Exec, Seven Years

Last week a federal judge in Michigan sentenced Volkswagen’s former head of environmental compliance in the United States, Oliver Schmidt, to seven years in prison for his role in VW’s emissions cheating scandal.

That’s a tough sentence for a compliance officer. And Schmidt deserved every day of it.

As far as the compliance community should be concerned, the single most damning piece of evidence against Schmidt was an email he wrote on April 2, 2014. That was the day he learned that environmental researchers had stumbled onto Volkswagen’s “defeat devices,” meant to deceive federal regulators measuring nitrous oxide emissions from VW cars.

As soon as Schmidt heard that news, he emailed a colleague about and said: “It should first be decided whether we are honest. If we are not honest, everything stays as it is.”

Put a fork in your compliance career the moment you say something like that. A compliance officer can never propose anything other than honesty; a compliance officer should never even allow others to entertain the idea that something other than honesty is acceptable.

Well, Schmidt did. The rest is history, and the profession should spare no tears for him.

That history is spelled out in the indictment and affidavits against Schmidt, and the history is not good. Schmidt was head of VW’s Environmental Engineering Office from 2012 into 2015. Starting in 2014, he and other VW executives chose to deceive regulators about the emissions discrepancies,

In July 2015, for example, Schmidt received a full briefing on the defeat devices. He, in turn, briefed VW’s senior executives in Germany on July 27 about the defeat devices and VW’s precarious legal situation. VW decided to continue a course of deception.

During a meeting with U.S. regulators on Aug. 5, 2015, Schmidt offered more excuses and flimflams about technical irregularities in the emissions testing, when he knew the truth: VW had installed defeat devices on its cars. Prior to another meeting with regulators at the end of August, Schmidt knew that some VW managers were maneuvering to keep yet another manager out of that meeting. That other manager eventually blew the whistle on the defeat devices.

Heightened Duty to Ethics

Yes, Schmidt was more a regulatory compliance officer than an ethics and compliance officer. Some people say that therefore his case doesn’t count as an example of compliance officer liability, since he was in charge of regulatory reporting rather than building an ethics and compliance program.

I see the argument, but don’t agree. Schmidt was a compliance officer. He was as a conduit between Volkswagen and the public, the public being represented by the government. It was his job to ensure that VW lived up to the environmental compliance obligations “the public,” in our infinite wisdom, imposes upon all car makers.

Instead, Schmidt deceived U.S. regulators. He counseled other VW executives about whether to deceive U.S. regulators.

Regulatory compliance may only be a subset of corporate ethics and compliance, but it is a subset. To say otherwise implies that regulatory compliance exists solely to ensure that the proper papers are pushed back and forth between company and government.

I don’t buy that. Every business process rests on certain values and ethical principles. That includes the boring business processes, and let’s not kid ourselves: regulatory affairs processes can be exceedingly boring.

Still, they matter. VW’s emissions of nitrous oxide were 40 times permitted levels, NOx reacts with other organic compounds in the atmosphere to create smog. High levels of NOx can worsen bronchitis, emphysema, and other lung disease.

One value at stake here came from the U.S. public: we value clean air. Another comes from a much older Judeo-Christian code: thou shall not bear false witness. Schmidt violated the latter, to violate the former, and leave all of us worse off.

So of course he should have paid a steep price, and so he did. That he was a compliance officer makes it all the worse, because compliance officers have a higher duty to good conduct.

Indeed, I can’t help but notice that Schmidt’s sentence came down just days after an SEC official gave a concise speech in Washington about stepping forward and calling out misconduct. I covered that speech last week, but let me repeat one part here:

And in my experience, people often fall into the trap of thinking someone else will address larger problems. When it gets to the point where we and the Division of Enforcement are involved, there’s often a great deal of finger-pointing and blame shifting … But few would argue with the idea that, had some party to the matter stepped up and taken more responsibility for resolving an issue, investors could have avoided harm, or at the very least, the company could have avoided the cost and effort of addressing other significant consequences (including responding to an enforcement investigation).

Words that any compliance officer should live by, even when doing so is hard. Oliver Schmidt, who turned aside from that duty compliance officers have, and look where it got him.