On Wednesday, January 11, 2017 German auto-maker Volkswagen pleaded guilty to charges of conspiracy to commit wire fraud and to violate the Clean Air Act, as well as customs violations and obstruction of justice.  The company agreed to pay an astounding $4.3 billion in criminal and civil penalties, which when combined with the settlements paid to car owners may total an eye-popping $20 billion.

The federal investigation stems from Volkswagen having lied about emissions tests for approximately 11 million diesel vehicles.  U.S. regulators began investigating the company after an academic study demonstrated that Volkswagen’s diesel automobiles emitted less pollution during official omissions tests as compared to on the road.  The investigation revealed that the company’s executives knew that the cars were programmed to deliver better emissions results during testing, and then tried to hide that fact from the EPA for over a year.

The most notable aspect of the Volkswagen case is not the dollar figures so much as the criminal liability attaching to both the company and individual executives.  The Justice Department has been criticized of late for being too lenient on the banks at the center of the 2008 financial crisis.  In contrast to the pattern of recent corporate investigations, Volkswagen did not obtain a no-liability settlement or deferred prosecution agreement.   In pleading guilty, Volkswagen is now on the back foot in terms of defending itself against collateral investigations brought by Attorneys General, other federal regulators, or shareholders who will inevitably file derivative lawsuits.

And, after being criticized for not holding individual executives liable for their actions at the helm of companies—embodied in the refrain “too big to jail”—federal prosecutors in the Eastern District of Michigan secured indictments of six Volkswagen executives and employees.  Oliver Schmidt, one of the six, was arrested earlier in January 2017 when he was visiting Miami, Florida.  Mr. Schmidt is charged with defrauding the government and violating the Clean Air Act.

The Justice Department’s position in the Volkswagen case is evidence that the policy vision outlined in the September 2015 “Yates Memo,” named after its author, Deputy Attorney General Sally Yates, is more than mere words.  The Yates Memo emphasizes individual culpability for corporate wrongdoing, explicitly admitting a policy shift from past DOJ practice.  Among the prosecutorial guidelines outlined in the memo are greater communication between criminal and civil attorneys and a greater “focus on individuals from the inception of the investigation.”  Whether it is emissions programs, anti-money laundering, securities, or anti-bribery, the risk for corporate executives to neglect compliance programs is now much higher if both they, and their companies, will be prosecuted.