Volkswagen fraudulently secured €400 million in loans from the European Investment Bank to develop the engine at the heart of the Dieselgate scandal, according to officials at the EU anti-fraud watchdog OLAF.

The results of the fraud probe are another blow to the reputation of the German car industry, following the Dieselgate revelations in 2015 and reports in the last few weeks that the big five players in the sector colluded secretly to thwart competition. Transport Minister Alexander Dobrindt told the car companies Sunday they had "a damned responsibility to rebuild trust and fix mistakes."

The OLAF investigation, concluded in the past few days, delved back into Dieselgate, when VW fitted engines with so-called defeat devices, or software that enabled diesel cars to perform far better in emissions tests in a laboratory than in real driving conditions. VW admitted that 11 million cars had installed the illegal software, enabling them to spew out more poisonous nitrogen oxides (NOx) than tests suggested they would.

OLAF officials said they opened a case in November 2015 to look into financing granted to VW in 2009 by the EIB, the EU mega-bank largely dedicated to infrastructure and development projects. The loan was supposed to help the world's biggest carmaker develop an engine that would comply with increasingly stringent emissions rules in the EU and the U.S.

The EU investigators concluded, however, that VW secured the loan by "fraud" and "deception."

OLAF's chief complaint was that the money was channeled toward VW's EA 189 diesel engine, although senior company employees knew that this model would only meet its emissions targets by using a defeat device. The EU investigators argued that VW failed to disclose this to the lender, and added that the EIB would not have granted the loan if it been fully briefed, according to officials familiar with the probe.

The EU investigators did not find, however, that EIB money had been used directly for creating defeat devices — which had been a subject of press speculation in the past 18 months.

Recommendation to prosecutors

OLAF itself cannot take judicial action. Instead, it has sent recommendations to public prosecutors in Braunschweig, who are leading criminal inquiries into VW, asking them to take its findings into consideration.

A spokesperson for the EU watchdog added it had also told the EIB to take "active steps" in implementing its anti-fraud policy.

It did not, however, recommend that any money should be clawed back from VW, because the carmaker had already paid back the loan in 2014, the spokesperson added.

Braunschweig prosecutors' office did not respond to requests for comment. The EIB said it was weighing up OLAF's conclusions "to determine more precise appropriate action."

VW did not respond to requests for comment.

The EU watchdog's case centered on two senior employees, Richard Dorenkamp and Thorsten Duersterdiek, according to the officials briefed on the case.

The investigation found that the two men were aware that shortcomings of the EA 189 engine meant that they would need to cheat to meet emissions targets. This information was withheld from the EIB in applying for the loan, and for the whole duration of the financing.

Before granting the loan, the EIB specifically requested information from VW about the environmental impact of the project to be funded, and received an email stating how the projects "were components of VW aspiration to become the most innovative mass car manufacturers with an emphasis on further reduction of emissions and fuel consumption."

In February 2011, once the EIB-funded project was completed, VW even sent material to the lender boasting of how successful it had been in slashing emissions.

“The main result, to produce fuel efficient and reliable vehicles as well as complying with new EU legislation to reduce car emissions, has been fulfilled. Therefore, the project was consistent with the Bank’s policy on climate change.

“The project has been implemented according to the technical description. The results are very satisfactory with carbon dioxide emissions reduction of up to 20 percent, NOx emissions reductions of up to 30 percent and particle emissions reduction superior to 90 percent for the diesel engines,” VW was quoted as saying in the EIB project completion report of December 2011.