U.S. prosecutors and Volkswagen AG are negotiating a settlement that could result in significant financial penalties after Justice Department officials found evidence of criminal wrongdoing in the car company's diesel-emissions cheating, said people familiar with the matter.
Federal prosecutors and Volkswagen lawyers have held preliminary discussions and are working to reach a settlement before the end of the year, though the timing may slip, the people said.
The Justice Department hasn't broached a specific criminal charge with Volkswagen, the people said. Prosecutors have previously charged other car makers with wire fraud and concealing information from government officials for safety transgressions.
Volkswagen last year admitted to misleading environmental regulators and consumers by installing illegal emissions-cheating software on nearly 600,000 diesel-powered vehicles in the U.S. In June, it agreed to a separate civil settlement to pay regulators and consumers up to $ 15 billion.
The German auto maker is expected to face a large financial penalty as part of the criminal case, though the exact amount remains under discussion, the people said. The discussions so far have focused on a figure that would combine criminal and civil penalties, they said.
Prosecutors from the U.S. attorney's office in Detroit and the Justice Department's fraud and environmental crimes sections in Washington are still weighing whether to seek a guilty plea from Volkswagen or pursue a so-called deferred prosecution agreement under which the government would aim to later dismiss charges so long as the auto maker adheres to settlement terms, the people said. Over the past two years, Toyota Motor Corp. and General Motors Co. reached deferred prosecution agreements with the Justice Department related to safety lapses. Both companies expressed regret for those lapses and pledged reforms.
It remains unclear whether U.S. prosecutors plan to criminally charge Volkswagen employees, many of whom reside in Germany and would need to be extradited to face prosecution, some of the people said. Deputy Attorney General Sally Yates in June said the U.S. criminal probe involved "multiple individuals."
Volkswagen, the world's second largest car maker by sales last year, is expected to receive credit from prosecutors for cooperating with their probe and agreeing to the civil accord.
That credit could reduce any financial penalty, among other terms, in Volkswagen's final Justice Department settlement, they said. Prosecutors as recently as last week told Volkswagen they viewed the earlier settlement as a positive step, one of the people said. The earlier settlement left open future civil penalties and criminal liability for Volkswagen's conduct.
Volkswagen in January started organizing a more robust legal response to the crisis, aiming to reach quick settlements with authorities, said a person familiar with the matter. Volkswagen focused on the $ 15 billion settlement with consumers and regulators in part to earn goodwill from prosecutors, this person said. A federal judge also pressured Volkswagen and government officials to quicken negotiations.
The amount of any Justice Department financial penalty against Volkswagen is still being negotiated, these people said, but it could exceed the $ 1.2 billion Toyota suffered in 2014 for concealing unintended acceleration problems, a record for an auto maker.
Volkswagen set aside roughly $ 21 billion to deal with fallout from using defeat-device software that duped government emissions tests and allowed vehicles to breach legal pollution limits on the road, the company has said. The Environmental Protection Agency disclosed the cheating last September, leading to the resignation of Volkswagen's chief executive and sparking litigation, investigations and fines across the globe.
Volkswagen's civil settlement affected 475,000 diesel-powered vehicles with two-liter engines containing software allowing cars to appear clean during government tests but emit nitrogen oxides far above allowable standards on the road.
Volkswagen agreed to pay up to $ 10 billion to repurchase cars from consumers, and devote another $ 4.7 billion to environmental remediation and investments in promoting zero-emission vehicles such as electric cars as part of the June settlement.
Volkswagen is still negotiating a separate civil settlement stemming from 85,000 vehicles with three-liter diesel engines that feature illegal emissions software. Volkswagen is hoping to avoid repurchasing those vehicles since they are easier to fix and make compliant with emissions regulations than those with two-liter engines, one of the people said.
Dealers, meanwhile, remain saddled with affected vehicles they can't sell. The company's U.S. sales have fallen for nine consecutive months. Other litigation and investigations in Europe and Asia loom.
U.S. investigators are reviewing some 1.5 million documents as part of the Volkswagen criminal probe, Ms. Yates has said. Volkswagen in April said it would delay releasing preliminary findings of an investigation it ordered by law firm Jones Day amid concerns doing so could taint Justice Department interviews of the company's employees, who might seek to align statements with the investigation's conclusions.
Volkswagen in April said a "detailed statement of facts" on the emissions-cheating scandal is expected to be made public in the U.S., a common practice in criminal settlements, should the company and Justice Department reach a deal.
The company stumbled last fall when responding to revelations it deceived regulators and consumers. While company leaders apologized and Chief Executive Martin Winterkorn resigned, Volkswagen's interactions with government officials were contentious.
Write to Mike Spector at mike.spector@wsj.com and Aruna Viswanatha at Aruna.Viswanatha@wsj.com
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