Brian Lee CrowleyThe scandal engulfing German car manufacturer Volkswagen has raised an important question: How do we prevent companies from perpetrating fraud on consumers?

Macdonald-Laurier Institute Managing Director Brian Lee Crowley, writing in the Globe and Mail, says we need to get more creative than simply piling on more government regulation.

By Brian Lee Crowley, Oct. 1, 2015

A couple of years ago I bought a Volkswagen Jetta with a diesel engine. I love this car; it’s roomy, comfortable and thrifty. It generates fewer greenhouse gases than gasoline-powered engines. Even though I paid a premium price for it, I thought VW’s reputation for Teutonic engineering, reliability and service were worth it.

Like about 11 million owners of VW diesel cars worldwide, however, I was sold my car under false pretences.  While it remains to be established how high the scandal reaches into the executive suite at the German car manufacturer, what seems beyond dispute is that some VW employees knowingly conspired to mislead regulators about the emissions performance of the company’s diesel engines. Not only is this intentional fraud perpetrated on consumers, but a flagrant flouting of the laws in various countries intended to protect both people and the environment.

There seem to be altogether too many fools out there willing to risk everything for a paltry advantage in the marketplace

Things like this shouldn’t happen, but they do. So the question is what to do about it. Some people believe that much of the regulatory burden placed on companies to protect consumers and public health is costly and unnecessary because market relationships are based on trust and repeat business (presumably VW wants you to buy more than one of its cars over your lifetime) and only a fool would endanger the company’s most valuable asset, its reputation, in this egregious way.

Yet there seem to be altogether too many fools out there willing to risk everything for a paltry advantage in the marketplace. And not just in the car business, although there are lots of other examples of scandalous behaviour by GM, Toyota and others failing for years to fix problems that they knew were harming their customers. Banks and other financial institutions, for example, took outsized risks with people’s money and endangered the entire economic system. With impressive effrontery they then sent taxpayers the bill.

The lazy response is that smart regulation by an omniscient and benevolent government will sort this all out.  This is no more convincing than the belief that no company would put its reputation at risk in the hope that no one would catch them in the act.

Governments take unwonted risks too and for all the same reasons companies do, including greed, ambition and fear. After all it is hardly as if the existing and extensive regulatory edifice designed to test car safety and emissions compliance prevented the current scandal or its many predecessors.

Big companies like VW are politically powerful. Its home state of Lower Saxony owns a fifth of the company’s shares, and one in seven German workers owes his job one way or another to the auto industry. In an effort to keep the European auto industry competitive on the world stage, that continent’s regulators have a famously complaisant relationship with local manufacturers.

In a fraudulent manoeuvre no less despicable than that of VW’s, governments have set tough standards to appease voters and consumers, only to look the other way when companies gamed the testing regimes on which the regulations rely. This is why it is the rare driver indeed who actually gets the fuel economy promised by his car’s manufacturer; the otherworldly conditions under which fuel economy tests are carried out just bear no relation to real driving conditions.

America’s regulators are tougher, but it is only a matter of degree. For years GM and its regulators in the US were aware of faulty ignition switches found directly responsible for over 100 deaths. Toyota bucked and shied at taking responsibility for dangerous unintended acceleration problems that eventually led to over 8 million cars being recalled. These problems were ultimately corrected, and the companies fined, but it took too long, the fines were small relative to the scale of the infractions and the individuals responsible for such reprehensible criminal behaviour have not been brought to book.

It is worth remembering that it was not the regulators, despite all their resources, who caught VW in its nefarious behaviour. It was a tiny NGO who stumbled on the evidence when carrying out its own independent tests and then spent several years trying to get regulators to take notice.

We need more such outfits independent of both the companies and governments. A monolithic regulator is no better than a single car company that monopolises the market. Competition and contestability work, including through class actions suits where legitimately-harmed people can seek redress beyond what politically constrained regulators can do.

Finally there is a strong case for piercing the corporate veil and prosecuting individuals within these companies when they knowingly abet the defrauding and endangerment of the public. A few executives headed to the big house in handcuffs may be just the ticket pour encourager les autres.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.

MLI would not exist without the support of its donors. Please consider making a small contribution today.