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Volkswagen was a little more than a month away from the biggest crisis in its history when Oliver Schmidt, a high-ranking engineer for the carmaker who dealt with regulators in the United States, wrote a reassuring email to his superiors.
Schmidt had just met with Alberto Ayala, a deputy executive officer of the California Air Resources Board, the state's air quality enforcer. For well over a year, Ayala had been pushing Volkswagen to explain why its diesel passenger cars polluted so much more in ordinary driving than they did in California testing labs.
Schmidt's email, which has not been previously reported, was dated Aug 5, 2015. Hours earlier, on the sidelines of an industry conference in Michigan, Schmidt had presented Ayala with a binder full of detailed technical information which purported to offer a solution to the emissions problem.
The meeting"went very well," Schmidt wrote. He cautioned, however, that the information he presented might encounter"headwind" when it was examined by experts at the Air Resources Board lab in El Monte, near Los Angeles.
That was an understatement.
The experts soon concluded that the technical information Schmidt presented was yet another smoke screen ” the latest in a series of maneuvers by the automaker to hide its misdeeds. A few weeks later, having run out of excuses, Volkswagen was forced to admit that the diesels it had sold in the United States since late 2008 had contained software designed to camouflage emissions that vastly exceeded legal limits.
Media reports on the scandal have usually focused on Volkswagen's original sin: The company's decision in 2006 to equip its diesels with illegal software.
But the most costly aspect of the wrongdoing for Volkswagen may have been the cover-up that the company orchestrated after regulators first became suspicious.
The following reconstruction, based on interviews with dozens of participants and a review of internal Volkswagen documents and communications, shows that the cover-up spanned years and lasted until days before the company's lies were exposed. Volkswagen employees not only manipulated the engine software but also generated reams of false or misleading data to hide the fact that millions of vehicles had been purposely engineered to deceive regulators and spew deadly gases into the air.
Documents and interviews also shed new light on the role of Schmidt, the Volkswagen compliance official who is so far the only company executive to be put behind bars. Arrested when he visited the United States for the 2016 Christmas holidays, Schmidt is being held without bail awaiting trial for fraud and conspiracy in Detroit.

The alarm bells ring
Working with a meagre $70,000 research grant, students Hemanth Kappanna, Marc Besch and other members of a West Virginia University team set off a chain of events that exposed VW's massive emissions cheating conspiracy.
In early 2014, the graduate students and their professors, all from the university's Center for Alternative Fuels, Engines and Emissions, published a troubling report that exposed strange behaviour by Volkswagen diesels. At Volkswagen headquarters in Wolfsburg, Germany, alarm bells sounded.
In May 2014, after examining the study, Bernd Gottweis, Volkswagen's head of product safety, wrote a one-page report. It was included in the packet that aides gave to Martin Winterkorn, the Volkswagen chief executive, to read over a weekend.
Gottweis reported that a Volkswagen Jetta tested by the team from West Virginia had emitted 15 to 35 times the permitted amounts of nitrogen oxides during road tests. A Volkswagen Passat also tested by West Virginia researchers was five to 18 times over the limit. The same cars were able, however, to pass tests conducted on rollers in a laboratory.

A clear warning
Gottweis' memo delivered a clear warning to the very highest level of management of the risk that Volkswagen had been caught using an illegal defeat device. Although Volkswagen does not dispute that Winterkorn received the Gottweis report, the company has argued that there was no proof that Winterkorn read the memo, which was included in a stack of other documents.
If Volkswagen had been honest with U.S. officials at that point, the damage to the company's reputation and finances would very likely have been serious but not devastating. Similar cases suggest that Volkswagen would have paid a fine in the hundreds of millions of dollars.
But Volkswagen did not exploit the chance to be transparent.
An internal Volkswagen presentation, prepared soon after executives learned of the West Virginia tests, discussed various strategies the company could adopt to allay suspicions. One option was for Volkswagen to simply refuse to acknowledge a problem. Another option was to offer to update the engine software. But the update would not bring emissions down to the required levels, the presentation said. In the worst case, Volkswagen could admit there was a problem and buy back diesel cars sold in the United States.
"It should first be decided whether we are honest,"Schmidt wrote a colleague, according to the criminal complaint against him. The comment was cited as evidence that Schmidt was aware Volkswagen had something to hide.
The West Virginia report did not accuse Volkswagen of wrongdoing. But Ayala of the California Air Resources Board, or CARB, was sufficiently bothered by the results to initiate a more intense inquiry, taking advantage of CARB's clout as a regulator. Ayala collected a small fleet of Volkswagens to test, borrowing the cars from VW owners, who were paid a fee and received temporary replacement vehicles.
The tests performed by CARB's team confirmed that something was wrong but did not explain why. At that point, CARB officials say, they were not trying to expose wrongdoing by Volkswagen. They were just trying to figure out what the problem was, so that it could be fixed. It became a slow process.

More questions
"For every answer we got, we generated a couple more questions," Ayala said.
As the back-and-forth dragged on without a solution, Ayala grew impatient. Volkswagen representatives gave answers that the regulators regarded as evasive, nonsensical or dismissive. CARB's testing was wrong, Volkswagen complained. The outside air pressure threw off the results. The routes followed were inconsistent.
To try to resolve the engineering stalemate, officials from both sides held a conference call Oct. 1, 2014. The Volkswagen representatives included Schmidt and Stuart Johnson, an American who was his second in command. The Volkswagen executives unveiled a plan for a recall to update the engine software for diesels starting with the 2009 model year.
Accepting Volkswagen's assurances that the recall would fix excess emissions, officials from CARB and the Environmental Protection Agency allowed the 2015 diesels to go on sale.

Enhancing 'defeat device'
Volkswagen eventually updated the software in 280,000 vehicles. Afterward, the cars polluted less than they had, but the upgrade did not remove the illegal software code or bring emissions to within legal limits. In fact, Volkswagen brazenly used the recall to enhance the ability of the software to recognize when a car was being tested.
In June 2015, CARB's tests showed that the recall and software update had not solved the problem of excess pollution. Output of nitrogen oxides rose after about 23 minutes of driving, CARB said, one minute after the end of the standard test cycle.
CARB demanded that Volkswagen show it the software code that governed the emissions control system in the new 2016 models, which were already rolling off assembly lines. CARB also wanted to see the code in older models, so it could do a before-and-after comparison..
In Wolfsburg, a Volkswagen committee concerned with safety and regulatory matters discussed the growing crisis in the United States at a meeting July 21, 2015. The committee decided to create a task force to achieve"fast and effective de-escalation of the issue with officials," an internal memo said. Volkswagen should approach the regulators"offensively."
Volkswagen began to belatedly face up to the likelihood that the emissions problem would have legal consequences. In late July 2015, Volkswagen asked the Washington office of Kirkland & Ellis, a law firm with expertise in regulatory issues, for an opinion on the potential penalties.
In early August, the firm issued a five-page, single-spaced analysis that stated that Volkswagen would probably not be able to avoid paying civil penalties to the government. But the opinion also noted that the largest fine to date was $100 million imposed the previous November on Hyundai-Kia, the Korean carmaker. Hyundai-Kia had admitted overstating the fuel economy of 1.1 million cars and light trucks.
But there was an important distinction between Volkswagen's behaviour and that of other companies caught cheating. In the past, carmakers had almost always acquiesced immediately when confronted with evidence of emissions violations and cooperated with regulators.
Volkswagen had taken a far different approach. By August 2015, the company had spent more than a year procrastinating, providing regulators with false, misleading or incomplete information. It had carried out a recall that did not deliver the promised improvements. The company had continued to sell cars with illegal software, including 2015 models.
And Volkswagen continued to obfuscate. On Aug. 5, Schmidt, who the previous March had moved to a job in engine development in Wolfsburg, and Johnson, who had replaced him as head of emissions compliance in the United States, asked to meet with Ayala of CARB after learning he was scheduled to speak at an industry conference in Traverse City, Michigan.
According to Ayala, Volkswagen booked a meeting room at the conference. Schmidt and Johnson arrived with a thick binder of technical information and spent two hours going over it with him.

'It explained it all'
After he returned to California, Ayala turned the binder with technical information over to his staff.
A week later, the compliance engineers came back to him with the results of their analysis. The information provided by Volkswagen was nonsense. Only one possible explanation was left, the engineers said.
"That was the first time I heard the words 'defeat device,'" Ayala recalled."It explained it all."
CARB stepped up the pressure on Volkswagen, obtaining a 2016 model and making plans to test it, raising the risk of additional damaging discoveries.
Volkswagen executives realized they had run out of excuses. On Aug. 18, Johnson approached Ayala at an industry conference in Pacific Grove, California
Johnson admitted to Ayala that the Volkswagens contained a defeat device. Ayala was furious. Volkswagen had knowingly squandered California taxpayer dollars and allowed polluting vehicles to stay on California highways.
On Sept. 3, 2015, Volkswagen formally admitted to regulators that 500,000 diesel vehicles in the United States had two calibrations, one for tests and one for normal operation ” in other words, a defeat device. Winterkorn resigned before the end of the month, while insisting he had no knowledge of the wrongdoing.
The research begun with a $70,000 grant eventually cost Volkswagen more than $22 billion in fines and legal settlements, far more than the cost of equipping the cars with adequate pollution control equipment in the first place.
No one was more surprised at the outcome than the team at West Virginia University."We never set out to get crosswise with anyone," said Dan Carder, who oversaw the Volkswagen research as director of the university's Center for Alternative Fuels, Engines and Emissions."We were just kind of doing our jobs."
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