Evidence of increased toxic emissions at VW first emerged in 2014, prompting the California Air Resources Board (CARB) to start investigating VW, a letter by CARB to VW dated Sept. 18 showed.
Volkswagen initially denied it was trying to game the inspections, attributing the higher emissions readings to "various technical issues and unexpected in-use conditions,” the EPA said in its formal notice of violations on Friday.
The stonewalling continued until the agency threatened to withhold certification for the carmaker’s 2016 models, the EPA said.
“Only then did VW admit it had designed and installed a defeat device” that purposely lowered emissions while it was being inspected, the agency said. During regular driving, emissions would return to a much higher level, boosting the car's performance.
Any decision on emissions control mechanisms would have been taken at the group's Wolfsburg headquarters and not by regional divisions, a source close to Volkswagen said.
Germany's Robert Bosch supplies diesel emissions control devices to VW, an industry source said. Asked whether Bosch had supplied the electronic module central to the EPA test findings, a company spokesman said: "We supply components for exhaust after-treatment to several manufacturers. The integration is the responsibility of the manufacturer."
The way carmakers test vehicles has been coming under growing scrutiny from regulators worldwide amid complaints from environmental groups that they use loopholes in the rules to exaggerate fuel-saving and emissions results.
In 2013, an Indian government-named panel accused GM of flouting testing regulations by fitting engines with low emissions in vehicles sent for inspection. And in 2014, Hyundai and affiliate Kia Motors paid $350 million in penalties to the U.S. for overstating fuel economy ratings.
The European Commission said it was in contact with VW and U.S. regulators, but that it was too early to say whether any specific immediate surveillance measures were needed in Europe or whether VW vehicles in Europe were also affected.
VW shares fell 18.6 percent to close at 132.20 euros, wiping some 14 billion euros ($15.6 billion) off its market cap.