The U.S. Justice Department is assessing how big a criminal fine it can extract from Volkswagen AG over emissions cheating without putting the German carmaker out of business, according to two people familiar with the negotiations.
The government and Volkswagen are trying to reach a settlement by January, the people said, before a new U.S. administration comes into office and replaces the political appointees who have been overseeing the process.
The U.S. is sizing up Germany’s biggest carmaker at the same time it’s trying to settle a civil case with the country’s largest bank, Deutsche Bank AG — two companies that, together, directly account for more than 320,000 German jobs. In the case of Deutsche Bank, which is seeking to settle U.S. allegations over its crisis-era mortgage securities business, investors are asking whether the Justice Department would seek a penalty so high that it would leave Deutsche Bank short of capital. As the U.S.’s Volkswagen calculations show, the department is showing that in some cases, it will take a company’s financial health into account.
Volkswagen has already agreed to pay an industry-record $16.5 billion in civil litigation fines in the U.S. after admitting last year that its diesel cars were outfitted with “defeat device” software that allowed them to game U.S. environmental tests. The carmaker is also on the hook for outstanding civil claims from several states and as much as $9.2 billion in investor lawsuits in Germany, where it’s also under criminal investigation.
“The department doesn’t pick a number in a complete vacuum,” said William Stellmach, a former federal prosecutor now at Willkie Farr & Gallagher in Washington. “There are a number of cases where it has acknowledged that the impact of a financial penalty on a company was a factor in deciding what that penalty should be.”
In criminal prosecutions, the Justice Department may assess the impact of a charge or settlement on a business’s viability, and the resulting effect on shareholders and employees. A prosecution’s potential collateral damage is one of the factors the department considers under principles for prosecuting businesses laid out in the “U.S. Attorney’s Manual.”
The ability to pay assessments doesn’t necessarily result in a lower number, according to Stellmach, who isn’t involved in the VW case. Rather, the department can structure an agreement to soften some of the sting, such as an installment plan allowing for deferred payments, he said. Companies can also receive credit for penalties assessed by other regulators or authorities both in the U.S. and abroad.
VW has plenty of money to meet further fines, particularly because penalties tend to be paid over long time periods, according to Joel Levington, a Bloomberg Intelligence credit analyst.
“Despite all the damage that its reputation has taken, VW is still a company that might be back to generating $5 billion in free cash flow in 2018, and when you generate that kind of cash, it absolves a lot of sins,” he said. The Justice Department began negotiations on the criminal penalty in August, one person said.