By Barbara Lewis and Kirstin Ridley

BRUSSELS/LONDON (Reuters) - Volkswagen (VOWG_p.DE) is unlikely to face U.S.-style fines in Europe over its emissions scandal because of a softer regulatory regime and its home country Germany's determination to protect its car industry, EU sources and legal experts say.

The carmaker has been embroiled in crisis since last September, when it admitted it had cheated U.S. emissions tests using software known as "defeat devices".

The U.S. Justice Department is suing the German company for up to $46 billion for allegedly violating environmental laws - though some legal experts expect the final settlement to be far lower.

Other countries have also acted - Brazil and South Korea, for example, have both imposed fines of well over $10 million on VW for cheating on emissions.





But although VW says 8.5 million of the 11 million vehicles world-wide that contain banned software are in Europe, no European national authority has ordered any penalties so far.

EU sources and lawyers say it would be surprise if the firm received any significant fines in the European Union.

While the bloc outlawed defeat devices in 2007, there are no defined penalties for using such software to mask emissions. Under U.S. law, by contrast, carmakers must identify and describe any emissions control devices, meaning they can be pursued for omission or wrongful declaration, widening the scope for punitive action.

EU states are also reluctant to mete out tough financial penalties, because of an unwritten rule in the 28-member club that some national interests are sacred, according to the EU sources - and Germany's car industry has traditionally been one of them.

VW, Europe's biggest motor manufacturer, employs more than 750,000 people in Germany, and has been a symbol of the nation's engineering prowess. VW, Daimler and BMW, Germany's big three German carmakers, hauled in revenues of 413 billion euros in 2014, far bigger than the German federal budget, which stood at just under 300 billion.

Even if the European Commission wanted to impose penalties on VW, its powers are curbed. The EU executive can directly only impose financial sanctions on trade and competition issues. Lucas Bergkamp, a partner at law firm Hunton and Williams in Brussels, said any change to that "would be a huge step".

"In general when companies are already in great difficulties due to some crisis, European governments tend to be understanding and will not necessarily seek the imposition of all possible penalties," he said, adding he could not comment on VW specifically.

VW also declined to comment on anything pertaining to possible fines in Europe.





LAWSUIT THREAT

Britain has said it could prosecute a vehicle manufacturer if there were proof it knew or was reckless when supplying false information, for which there is an unlimited fine on conviction.

But proving recklessness is a high hurdle - it remains unclear who at Volkswagen knew what and when, while the company itself has blamed a small cadre of employees.

Lawyers say a bigger financial threat to VW than any EU regulatory fines is likely to come from private litigation. Lawyers are gathering investors for group actions in Europe and hundreds of lawsuits on behalf of enraged drivers have been filed in the United States.





The VW scandal has exposed the weaknesses of the regulatory system in Europe, where there is no EU-wide authority with oversight of car testing - like the U.S. Environmental Protection Agency (EPA) - but instead a patchwork of 28 national agencies with varying standards.





A vehicle approved in one country can be sold across the bloc, which environmental campaigners say allows carmakers to take their pick from national regulators.





However European Commission proposals, expected over the coming weeks, will add some teeth to the EU regulatory regime and penalties for excessive emissions could start to bite around the start of the next decade.

Some members of the European Parliament and environment campaigners want an independent EU-wide regulator, along the lines of the EPA.

European Commission spokeswoman Lucia Caudet did not entirely rule out establishing such a body, but said there were other ways to improve oversight.

"All options are on the table, but greater oversight can be achieved without the need for another EU agency," she said, adding it was too soon to give detail of a proposal expected "in the coming weeks".

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