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Photographyby Jana Jarecki
Three days ago, head of the German Ministry for Economic Affairs, Karl-Theodor zu Guttenberg, once more outsourced creating a draft version for a law to the international law firm Linklaters. You might remember the debate whether he should have outsourced writing the draft version of a law regulating financial markets (Gesetz zur Ergänzung des Kreditwesensgeschäftes) to the very law firm or should rather have adviced a ministry to prepare it in house. I’d like to talk about the latter case.
It is common practice in Germany to involve external expertise in the drafting process of a bill. Nonetheless certain questions should be addressed concerning Guttenberg’s Ghostwriters for the financial market law: Did he observe the rules for public tenders? Is outsourcing necessary in this particular case? If so, is Linklaters a good institute to carry out the job?
(i) Very basic, the procedure of searching for a relevant agent to carry out the job has to meet the requirements for any public tender: make it accessible for as much companies as possible in order to get the job done by the most qualified as well as priciest institute. According to Guttenberg, his ministry had inquired several law firms. Not only offered Linklaters to take the job cheapest but also were some of the remaining law firms bound by contracts with other departments. He seemed to have fulfilled this requirement, although I do not see the argumentative value of his second argument.
(ii) Outsourcing an administrative task to an external agent is tax-financed and thus all costs for the procedure have to be transparent. Linklaters, asked about the costs, did not reveal any of this information. Criticism, which I found on the internet, hence, fails: a lawyer has – by law – the obligation of secrecy concerning information about his mandate. Meaning the lawyers at Linklaters cannot reveal any information about the contractual relationship. Besides that, the contracting ministry itself is obliged to inform the public about costs and contract conditions concerning the outsourcing. The Ministry of Commerce was explicitly asked to disclose the information by members of the Green Party in August but refers to non-disclosure regulations within parliament. I am not a lawyer and cannot judge about that, but notice: in 2008, the German Budget Committee demanded more transparency about involving external advisors in administrative tasks and explicitly stated formulating drafts for bills among these tasks. I doubt that the Department of Commerce fulfilled this requirement cautiously enough.
(iii) Furthermore outsourcing has to meet the criterion, that the ministry (at the end of a long line of legitimation by our vote) does not hand all its legislative sovereignty to an external company. Although the Department of Commerce claims to have adjusted the law firm’s draft it seems, the Department forwarded it without changes to several other ministries (having Linklaters’ Logo still on top). Was the draft that good? Even if the draft had perfectly met the conditions, I know that, from a psychological viewpoint, the sheer presence of a logo can have effects on how to receive a written piece and how to judge it. This has to be handled more carefully.
(iv) Any conflict of interests between the matter in question and the law firm creating the draft should be avoided, which the Department of Commerce claimed to have considered. Aim of the Gesetz zur Ergänzung des Kreditwesensgeschäftes is to create a more effective regulation of capital markets. Linklaters, however, is partner of a company called True Sale International (TSI), which according to itself aims at promoting the German securisation market and Linklaters explicitly is responsible for advice on capital-market operations:
In particular, our practice advises on:
- true sale term and conduit transactions involving any asset classes
- synthetic securitisation structures
- secured loan transactions
- CDOs
- Derivatives
- (…)
The List of highlights contains advice on the first true sale securitisation of a portfolio of unsecured consumer loans, which is a form of securisation taking a position completely out of a bank’s balance sheet, including all risks, which are being sold to the investor.
This means that the law firm being advisor to a major promoter of asset backed securities from the beginning on is now responsible for creating the law restricting this very sector. I do see conflicting interests here.
(v) The contracted agent shall not have the opportunity to bring in its own interests through the formulation of the law. President of the German Lawyers’ Association Wolfgang Ewer states the possibility that Linlaters preserved self-interests would be low by reason of the legislative process, which the draft bill has to pass, alone. Considering the lack of quality of that legislative process in Germany in recent times (e.g. plenary speeches frequently submitted in written form only instead of leading to a substantial discussion, parliamentarians being absent when it comes to important topics like the internet censorship law), I find this argument very problematic.
The Department of Commerce itself justifies outsourcing by (1) the need for a fast draft version and (2) a current lack of personnel resources with enough practical experience for the complex, diverse legal questions within the Department of Commerce. Concerning (1): Indeed, outsourcing speeds up the drafting process a lot. But does this make the law any better? Concerning (2): My personal view is, that the ministry did not lack manpower: There are 1800 employees in the Department of Commerce alone and the draft should be created in cooperation with the Department of Justice. However, this point is debatable: More than 10000 jobs within the supreme federal authority have been axed between 2004 and 2005 and the ministries were not prepared for the workload due to the financial crisis.
Assume, the Department itself lacks those resources, how do the ministers trust parliament to have enough specialized practical experience and knowledge to find lobby interests hidden in the draft version of a law firm’s bill?
The Federal Government says it was the obligation of the contractor (read: Linklaters!) to ensure that legal standards are obeyed. This means they obligate the profiteer of the conflict of interest to avoid the very conflict.
(vi) The ministry has to ensure that sufficient professional knowledge is at least brought in by the agent they employ.Say, they cannot provide the knowledge in house. If so, it is necessary to guarantee that the external agent is capable of at least the same or even more amount of expertise in comparison to an in house expert. Responsible for the draft at Linklaters was Jan Endler whose special fields of law are
European Law, e.g. Public Procurement Law, Law of Regulated Industries (Water, Traffic, Energy, Healthcare), State Aid, Law of Subsidies, advice during privatisations, Environmental Law.
Financial banking law is not among those fields.
To sum it up:
It is neither ensured that the draft was created by an expert within the law firm Linklaters nor seem Linklaters free of conflicting interests concerning the regulation of financial markets and furthermore it is unlikely that interests carefully hidden in the law would be recognized by parliament or the ministers.
September 23rd, 2009 at 04:54
An excellent article about the fraud that is taking place right in front of us and our representatives. This is the same category as the Goldman guy as chairman of the Finance Regulatory Commitee. I bet we have enough expertise in all our departments of government, so that literally no bill ought to be crafted elsewhere. If government agencies create the drafts, it’s at least legally more certain that the interest of the public is served as they are bound to it by oath. Linklaters could not care less if it was not for the money they receive for the task (and maybe future contracts). If there really is no conflict of interests, external advice may be considered, but usually one can assume that there is a conflict with most of the available contractors.
Speaking of TSI… they were THE vehicle to promote derivatives and other obnoxious financial products in Germany. Asmussen (he again) played a major role in that game and later became a secretary in the financial department. Not to its glory, I would say.
Thanks for the insight.
September 23rd, 2009 at 10:10
Thank you very much. Are points (i) to (vi) from an official catalogue – and if so, which one? Has there been any response from Linklaters so far (what kind of name is that) except for stating that they can’t possibly disclose information about the contract?
ta-ta
E.
September 23rd, 2009 at 10:36
First, I find this debate quite strange and I don’t think it would have ever come up if it wasn’t for the elections (and certain parties would not be that desperate).
Then, even though the costs are not revealed, as far as I understand, they have been paid from the budget of the ministry of commerce. In my opinion, it is totally legitimate for any minister (even Gabriel – sorry couldn’t resist) to judge over the usage of her/his budget if only the output is right.
Some ministers were quick to say that they would at least have had the emblem of the external agency removed. But that would have been what I consider fraud: Claiming you did something that someone else did for you.
And does the fact that the ministry employs 1800 people guarantee that they have experts on every matter? I don’t think so. Writing a law is certainly much harder than understanding it. And if you think that the ministry (and other ministries and experts from other parties and so on) would not have found some hidden preferential treatment for one of Linklater’s 500 partners and thousands of contractors in their draft, how are they supposed to write the law first-hand?
And can you imagine Jan Endler sitting alone in his room in front of an empty sheet of paper and making up some law? Well, even if you can, it doesn’t work that way. I would be surprised if he wasn’t the leader of a small team of different experts on the topic. Judge quality by the work done, not by arbitrary assumption about the people who did the work (how can we judge the abilities of people we have neither met nor even seen if not by their work?).
Now, my final question is: Is there something in the (corrected) draft that you consider an injustice or preferential treatment of someone?
It’s easy to judge something by the way it’s done and by the people who did it. The circumstances may not conform with some funny little ideas of ourselves how things are supposed to be and then we object to it without bothering to have a look on the matter itself. I would call that prejudice.
September 23rd, 2009 at 17:40
Hello everyone,
thank you for the comments.
@Franz
Generally I do not consider outsourcing as a bad practice. I’m with Thomas, saying that the Government does not have to provide experts for each and every special field of law. Involving external expertise has to be considered thoroughly. (And, yes, there was some debate weather drafts have to be written by members of the government themselves, which consider too narrow.)
@E
Those points are no formal catalogue, but what I remember from public law. I don’t have this book at hand at the moment.
Nothing about Linklaters (on the internet) unfortunately.
@Thomas
About the Logo: The idea behind involving external expertise is, that they should provide help, and only help (in order not to violate the due process of law). I think it is likely that the draft might be received differently having the logo on top (psychologically) and circulating around like that it is not likely that the ministry has amended the law (legally). Of course, both are assumptions. Generally I agree, ministries should not avoid to communicate external authorship, I do criticise the way it was communicated as well as missing involvement of internal control.
I hope that parliament or the ministry inherit sufficient expertise to find lobby interests hidden in a draft (generally, in every draft being created with external help). The best alternative – imho – would have been to check the law firm more carefully, maximizing expert knowledge but minimizing chances for conflicting interests.
Good point:
I can not judge the qualities of the person Jan Endler. Neither in one nor the other direction. I judge about the procedures applied, just as you mentioned.
I did not address substantive law for the reason I wanted to view the case from a formal perspective. I am not firm enough in matters of substantial law. (If you happen to be a lawyer, please comment your opinion about the draft for the Gesetz zur Ergänzung des Kreditwesengesetzes.) Broadly speaking, I consider some formulations of the draft imprecise. The law itself seems to be quite identical to a draft by the Ministry of Finance, which was rejected by CDU/CSU in March.
I think it is important not only to consider the output, but also the way a law is created to minimize risks.
September 25th, 2009 at 00:07
I DO think that outsourcing is bad practice. There is a parlament and government elected by the people for the people. So if they have problems formulating laws for special fields of interest, there are 2 options:
1. The field of interest is too narrow and the law in question is too explicit or cannot be understood by most of the participants, let alone the people. Then it is better to abandon the legal process, as the interests of the people are not served, i.e. a new regulation would probably cause a deterioration of legal security or other goods. Concerning Linklaters this means that we do not need a specific draft that tries to preserve the unregulated conditions in the financial markets as far as possible, but we need legislation that protects the people, be it the regular tax-payer or more involved guys like investors. A law that almost nobody understands is probably a law that serves not the general interests, but particular interests of a small lobby. Hence it is unwise to outsource the legislative process to (anyway probably biased) consulting agencies that provide experts for the matter at hand. It is much wiser to either abandon the process because it is not relevant or probably harming to the people or…
2. Consult a much broader audience that features experts from as many sides of the problem as possible. There is a much higher chance that the law reflects the will of the people when all interest groups have a say. This method is often (but unfortunately not always) employed in the legislative process of the EU and also in considerable amounts in the Bundestag, so called “Expertenanhörungen” (no details on that now). Yet an agency like Linklaters does not bring diverse interests together, but cooks its own soup with its bunch of internal experts. This is not democratic, but a Platonic oligocracy. If you want to read up on the foundation, implications and dire consequences of such an oligocracy, I highly recommend Popper’s “The Open Society And Its Enemies”. As important views are not considered in a law crafted by remote experts and, in contrary, such laws may tend to promote certain lobby interests and deteriorate the well-being of the people, such a process is unacceptable in a democratic society. Note: It would be ok if Linklaters was _one_ of many parties voicing their opinion and expertise on the subject in the legislative process, but not when it is the main one or – even worse – the only one.
And no, the ends do not justify the means. Democracy is not a “funny little idea”, but the very foundation of our system.
September 30th, 2009 at 23:49
Expertenanhörungen… gute idee
October 6th, 2009 at 01:51
One late addition I found at Attac’s: http://www.attac.de/aktuell/presse/detailansicht/datum/2009/08/13/attac-fordert-jagt-diese-berater-endlich-in-die-wueste/?cHash=7ed2a0b2f4