California regulators rejected Volkswagen AG’s plan for recalling thousands of diesel-cheating vehicles, posing a potentially costly obstacle in the 10-month scandal as criminal probes and lawsuits on three continents roll ahead.

The California Air Resources Board said in a statement Wednesday that the proposal for Volkswagen, Audi and Porsche models with 3.0 liter engines rigged to cheat emissions tests was inadequate. The agency, along with the Environmental Protection Agency, will continue its talks with Volkswagen in hopes of finding a fix, CARB said in letters dated Wednesday to Volkswagen executives and attorneys.

The agency has been in talks with the carmaker over the 3-liter engines since at least Feb. 2 when it filed its first “single, incomplete recall plan," according to the letters. Additional data submitted by Volkswagen as recently as June is also “incomplete” and “substantially deficient” to meet the legal requirements for the cars to be fixed, CARB said.

The rejection of the automaker’s proposal for fixing about 85,000 VW, Audi and Porsche vehicles with 3-liter diesel engines shows that the emissions-cheating scandal, despite a landmark $14.7 billion settlement, is far from over. That agreement, covering 480,000 cars with 2.0 liter engines, will require Volkswagen to devote as much as $10 billion to buy back the cars. A federal judge in San Francisco is considering whether to approve that settlement, which would also allow owners to have their cars repaired if a fix is approved by federal and state regulators.

“It seems that a buy back is a definite possibility if there’s not a solution that makes them street legal,” Kelley Blue Book senior analyst Rebecca Lindland said in an e-mailed statement. “A buy back, while solving the problem for CARB, doesn’t solve the problem for consumers who may not want to give back their vehicle.”

The German carmaker reached a related $603 million settlement with 44 U.S. states to resolve consumer and environmental claims.

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The CARB announcement was a procedural step under state laws governing recalls, Volkswagen spokeswoman Jeannine Ginivan said in an e-mailed statement.

“We continue to work closely with the U.S. Environmental Protection Agency and CARB to try to secure approval of a technical resolution for our 3.0L TDI vehicles as quickly as possible,” Ginivan said.

Close Coordination

The EPA agrees with CARB’s decision that the proposed fix isn’t adequate, said Julia Valentine, a spokeswoman for the agency.

“EPA is working in close coordination with CARB, and we agree that VW has not presented an approvable proposed recall plan for the 3.0 liter diesel vehicles,” she said in an e-mailed statement.

About 16,000 of the vehicles with polluting 3-liter engines are in California. The engine is used in the Audi A6, A7 and A8 sedans and Q5 and Q7 sport utility vehicles, as well as the Porsche Cayenne and the VW Toureg SUVs.

CARB’s letter to VW lists 10 specific failures of their proposed solutions. They include the carmakers’ inability to provide a full description of the so-called defeat devices, the impact the proposed fix would have on performance, the impact of repairs on emissions or even a description of the fix in a manner that would allow CARB to evaluate their feasibility, according to the letters.

“It is unfortunate for VW since they were probably hoping for a more positive resolution for this engine,” Jessica Caldwell, director of industry analysis at Edmunds.com.

Criminal Probes

U.S. District Judge Charles Breyer, the San Francisco judge who demanded that Volkswagen reach a deal to get the polluting cars fixed or off the road, has set a July 26 hearing on preliminary approval for the settlement covering 2-liter engines. He has scheduled Aug. 25 for lawyers to report their progress in reaching an agreement for the 3-liter engines.

VW still faces lawsuits by at least five states plus investors and dealerships in the U.S., as well as parallel lawsuits, including consumer complaints, in Germany, all of which could raise the scandal’s price tag for the automaker. Future expenses will also include perhaps hundreds of millions of dollars in fees for the lawyers representing car owners. More penalties, along with further damage to VW’s reputation, may yet spring from criminal probes in the U.S., Germany and South Korea.