1. Germany

1.1 Political Power Games and Conflicting Interests

1No bilateral treaty had ever failed ratification by the Bundesrat – but the coalition of the center-left Social Democratic Party (SPD) and the Green Party dramatically increased the odds of such an incredible first! Therefore, Finance Minister Wolgang Schaüble set off to break the combined majority and win the votes of SPD and Green State governors.

2“Continuous sources of income are of critical importance to States that must reach equilibrium by 2020;” under Germany's balanced budget act passed in 2009, all German States were required to balance their budgets by 2020. For that reason, the opportunity of financial inflow through the Swiss tax agreement had to be carefully considered, even if some believed that income could be higher if Germany pursued its strategy of buying lists and hiring tax investigators. “The challenge for Schäuble was to convince SPD, Green Party or ‘grand coalitions’ of CDU and SPD State governments, to vote the agreement.”141

3At this stage it was believed that the tax agreement would go through the German ratification process in fall (end of the summer for the Bundesrat and November for the Bundestag). Interestingly, the November deadline coincided with the announcement of a possible Swiss referendum on the tax agreement with Germany. It would, if appropriate, have taken place on November 25, 2012.

4In the meantime, the SPD announced it would vote against the agreement in the Bundesrat. At the same time, members of the Bundesrat – often Minister Presidents of German Länders – were actively involved in public debate, increasing pressure on the Government. Some of them mentioned they would pursue using stolen data – to which the German government replied it would not finance such future endeavors.

1.2 No Agreement is Better that a Bad Agreement

5At the end of January 2012, the Finance Minister of Baden-Wurttemberg – the third Land in economic importance and population – Nils Schmid (SPD), mentioned that no compromise could ever be made on important issues: therefore, no agreement was better than a bad agreement.142 Over time, Baden-Wurttemberg had become increasingly critical about the tax agreement, arguing that it would settle the past of German residents who had undeclared assets in Switzerland, offering a premium to fraud. The German state of Baden-Württemberg was an important partner for Switzerland, especially for the Swiss border cantons. By 2012, over 57,000 Germans crossed the border to work in Switzerland every day, generating an annual business income of an estimated CHF 7 billion.

6Mid-February 2012, the Finance Minister of North Rhine-Westphalia, Norbert Walter-Borjans (SPD), raised the possibility to tax German assets in Switzerland higher than if the assets were in Germany.143 He believed that the amount Switzerland would pay Germany – as an act of good faith, once the agreement entered into force – was not high enough and should reach CHF 5 billion.

7According to German calculations, the agreement would represent a payment of an estimated CHF 12 billion in total, with CHF 2.16 billion going to North Rhine-Westphalia, CHF 1.56 billion to Bade-Wurttemberg, CHF 420 million to the Land of Berlin, CHF 300 million to Hamburg.144 The Länders immediately contested these figures.

8Sigmar Gabriel, Head of the SPD party in Germany, announced through the German Press Agency DPA145 that “if Switzerland could guarantee, before the entry into force of the tax agreement, that tax evasion would no longer be possible, then the SPD would support the ratification of the tax agreements.” On that same occasion, his colleague Nils Schmid sustained, “if the agreements failed, Germany would be interested in buying CDs containing data about German undeclared assets in Swiss banks.”

1.3 Was the Future of the Agreement Green?

9Tax issues were not the only source of tension between Germany and Switzerland: the noise of aircrafts on their approach to Zurich over Southern Germany was a longstanding issue of disagreement. The Swiss media was prompt to raise an eyebrow when Baden-Wurttemberg Minister-President Winfried Kretschmann (Green Party and therefore ensuring coalition at the Bundesrat) visited Switzerland at the end of April 2012, he met with not less than 4 Federal Councilors. During this visit, an agreement was found on the aircraft noise, as well as on a number of other issues. One of the speculations was then that this visit would contribute to get a positive outcome to the vote for Chancellor Merkel’s “small coalition” government.

10“Rules regulating whether and how a Level I agreement must be ratified at Level II may change the country’s win-set, and hence the outcome at Level I”.146 In this case, the relevant institutions going through the ratification process might also contribute to shaping the final content of the agreements.

2. Switzerland

2.1 Tax Agreement Ratified by Parliament, Pending a Referendum

11Back in Switzerland, pressure was mounting.

12Oswald Grübel opened fire mid-April 2012 in the press. He, who had led Credit Suisse and UBS, qualified the Federal Council’s policy as “reckless,” saying the strategy of clean money was “unrealistic.” Regretting that “Switzerland gave in to every pressure,” he said, “20,000 jobs could be lost.”147 A week later, UBS Sergio Ermotti declared, “the attacks against bank secrecy are nothing other than economic warfare against Switzerland since 2008.”148 The general view was that Switzerland was very poorly defended internationally, and that at least, negotiators should have obtained guaranteed access to the European financial services market for Swiss banks and intermediaries. 149

13There was a view that Switzerland should not comply with a system fundamentally inconsistent with its own legal system. As former Swiss President Pascal Couchepin put it: “This is the first time in the history of civilization that a country that is not colonized offers to levy a tax for other states.”150 Furthermore, according to Jacques Rossier, former partner with Lombard Odier Darier Hentsch, “the Swiss financial center needs to use its power of proposal. For instance, the OECD is the only Club our country is a part of, without having a say.”151

14The text of the tax agreement was voted by the Conseil des Etats on May 29th, 2012. Two days later, the Conseil National adopted the proposed tax agreement with Germany by 108 votes (81 against and 2 abstentions); the tax agreement with the United Kingdom was also accepted by 109 votes (81 against 81 and 1 abstention) and the agreement with Austria by 138 votes in favor (51 against and 2 abstentions).

15The UDC and PS attempted to oppose the vote but did not succeed. The UDC argued that Switzerland had made too many concessions to both Berlin and London and called the Federal Council, to no avail, to renegotiate the agreements. It suggested clearer guarantees regarding the use of stolen data, banning investigation by German tax investigators in Switzerland and lower tax on regularizations as well as returns on capital.

16The Socialists (PS) were not much more successful when suggesting that Parliament should only address the issue during the fall sessions of the Conseil National, once the Federal Council had presented its strategy on “clean money” (it was initially expected to be issued in September 2012). The Socialist group also insisted on the fact that the agreements should be considered as an addition to the automatic exchange of information and not as an alternative, as considered by the Federal Council. During the debates, quite a number of critics emerged as regards to a possible reciprocity that was expected for undeclared Swiss assets in Germany, United Kingdom or Austria. There were also suggestions that the Federal Council should negotiate with developing countries and that foreign investors who withdraw their assets as a result of the tax agreement entering into force should systematically be reported.

17After a positive vote by the Conseil des Etats and despite an alliance of right-wing UDC and a left-wing semi-coalition, the Conseil National adopted the Federal Act on International Withholding Tax (IWTA) on June 15, 2012.

18On June 15, 2012, the ASIN152 League and taxpayers (close to the UDC) – as well as the Youth movement of the UDC on June 16, 2012 and the Youth movement of the Socialist party on June 30, 2012 – announced they would launch a referendum and collect signatures against the tax agreements. The right wing party considered that the agreements had been badly negotiated while the left party believed that these agreements undermined the fight against tax evasion.

19According to a poll conducted by Isopublic for SonntagsZeitung regarding support of the tax agreement with Germany, nearly 70% of respondents declared the accepted it,153 while only 21.1% would reject it. Nevertheless, political parties feared that banks could compromise the outcome of a referendum if it did take place. It was hoped bankers would not enter the campaign and continue adopting a low profile. But in the light of the importance of the issue for the future of the Swiss financial center, this seemed like wishful thinking. Bankers would have been active in the campaign, had the referendum taken place. “Domestic interest groups (such as bankers) need not be merely “ratifiers or nonratifiers” – a static element in the win-set equation that leaders manipulate to gain a stable agreement. Manipulation extends two ways, for domestic interest groups are also capable of strategic action to mold win-sets.”154

20It would certainly be of interest to study how this particular political agenda was acted upon, politically and domestically and how poll agencies built their poll, how the timing of publication was determined as well as who commissioned it. It would also be of interest to analyze why, in addition to ASIN, only the “junior” movements of political parties (UDC and PS, both for different reasons) chose to support a referendum on the tax agreements. But such is not the objective of this paper, as the referendum would have taken place after this paper was finalized; in addition, investigating the process through which people’s preferences and identities are shaped is a tremendous task.155

21In the end, the deadline to collect the 50,000 necessary signatures for a popular initiative started on 19 June and expired on September 27. Had it been successful – it was not – the Swiss would have voted on the three tax agreements on 25 November 2012.

2.2 The Swiss People: The Country’s Supreme Authority

22While opposition from the UDC or the threat of a referendum had been anticipated – it was considered as reaction to the previous unsuccessful ASIN referendum – opposition from the left wing parties in Parliament was a surprise. Christian Levrat, President of the Socialist Party, supported the SPD critics against the tax agreement, but his party then ratified the tax cooperation agreement with Germany in Parliament.

23Cooperation or policy-making can be influenced by discussions at international level but control of these policies ultimately lies with governing bodies or, in the case of Switzerland with the People, the country’s supreme political authority.

24“Since 1971, referendum committees have been successful on 94 occasions. They overturned parliamentary approval on federal acts or decrees on 30 occasions or almost one third.”156

25Although it is a decisive part of the ratification process, the Swiss referendum process cannot be at the top of a negotiator’s mind; it is Parliament – natural antechamber to referendums – and questions from the Finance Commission that remains the negotiator’s priority.

26Referendum can also be used as a tactic during negotiation. Parliament’s estimated acceptance or refusal to ratify an agreement can be used as a bargaining tool, as is anticipated opposition by groups of interest or citizens to a particular aspect of a negotiated agreement, either to force an agreement or to walk-away from a deal. In the particular case of a tax agreement with Germany, the question of a referendum was almost certainly not raised (or used) during the negotiations. “Manipulation of foreign perceptions of what can or can’t be ratified is not an effective strategy.”157 Parties to the negotiation sometimes have difficulty in convincing their opponents that their “hands are tied.” However, there seems to be evidence that they are also surprisingly likely to misjudge what can be ratified in their own parliamentary ranks. According to P. Evans, “the only case in which tied hands could be effective is in negotiations among friends that involves disagreements over means instead of conflicting interests…” The other case is when the hands of the negotiator are actually tied by domestic public opinion.158

27According to Bernhard Ehrenzeller, Professor at the University of St-Gallen and Daniel Kübler of the Center for Democracy in Aarau (established by the University of Zurich, the City of Aarau and NCCR Democracy),159 if the population had called to vote for all “important” international agreements since 2003, more than 77 would have been put to the vote; this would have represented the double of an average annual number of votes in Switzerland.

28The number of international agreements or treaties subject to optional referendum in Switzerland has increased sharply: between 1921 and 1977, there were 57 international agreements or treaties; and from 2003 to late 2011, the figure rose to 142. Yet despite the increasing number of agreements subject to optional referendum, the number of agreements actually put to the vote of the Swiss people has declined. Between 1921 and 1977, the referendum was requested for 1 agreement out of 19, between 1977 and 2003, 1 out of 28 and between 2003 and 2011, for 1 out of 35.

3. The Challenge of Reputation Management and Building Coalition – From Lobbying to Public Diplomacy

29No other aspect of the Swiss banking system is surrounded by so many myths, legends and misunderstanding as privacy or banking secrecy. Often featuring at the top of the lists of tax havens, presented as a secretive, non-cooperative country, Switzerland has much to do proactively for its reputation, domestically as well as on the international scene. NGOs themselves referred to “serious reputational risk” should current policies be maintained. Politicians do the same as part of their domestic campaigns. “The Swiss banking industry enjoys a strong international reputation but its success has led to regular attacks and stigmatization; and the banking secrecy obligation of the banker is often misunderstood. Most foreign governments understand our attachment to the fundamental right of citizens to benefit from privacy including in their financial matters; however political objectives often take over as foreign fiscal policies might not always be as balanced as desirable, leading to breaches of trust between State and citizens.”160

3.1 Reputations Management: Between Fixing the Lasting Effects of the UBS Crisis and Managing Commercial Attacks

30Swiss banks quietly adopted the tax compliance strategy decided by the Federal Council. Like the controversial “certificate of tax compliance” suggested in November 2009, an unprecedented practice which became a reality without anyone venturing to oppose it publicly. The stakes were so high for banks present internationally (US and EU), that it appeared the only choice possible, particularly following the Federal Council’s decision to put order back into the Swiss Financial Center. Besides, the DNA of the Swiss banking industry is so diversified that deciding on a common policy is challenging, not to say impossible: big banks supported automatic exchange of information while private banks were in favour of resolving the past; big cantonal banks were probably supporting the big banks and medium or smaller cantonal banks were outraged by the price to pay to comply with yet new regulations and treaties. In the background of these gaps, still remained the UBS crisis for which the entire Swiss Financial Centre had been requested to pay the price. The rescue of the country’s largest bank in 2008 and the CHF 60 billion from Swiss taxpayers (to create a fund for its “toxic” assets) as well as a number of regional market distortions during the rescue plan, created long lasting damages and resentments amongst many actors in the industry as well as with customers and the Swiss population.

31The challenge of reputation management for the Swiss banking industry – as with other leading industries – was first and foremost about mastering the power to convince, using Max Weber’s understanding of “positive power” as “the ability to influence third parties in the desired way and using his or her position to carry out his or her will, despite resistance.”161 One of the channels is obviously the media, acting direct and personal, or indirect and collective, the later remaining the area of public opinion. Another obvious channel is lobbying and managing corporate affairs proactively.

3.2 Lobbying Brussels

32There were approximately 13,000 corporate lobbyists and association in Brussels for 15,000 European civil servants.162 This makes the Belgian capital the biggest playground for lobbyists in Europe; as a result, the development of EU guidelines is unthinkable without the technical assistance of the affected industry, institutionalized through permanent committees. There were also an estimated 700 financial industry lobbyists active in Brussels. In order to counter the influence of these lobbyists, members of the Economic and Monetary Affairs Committee called for the creation of a non-governmental organization that could provide counter-expertise to the expertise provided by the financial industries and their lobbyists.163

33As a non-EU member, Switzerland is actively lobbying in Brussels, for instance through the services of the Swiss Mission to the European Communities (headed at the time by Ambassador Alexis Lautenberg and 12 employees). A number of pro-banking lobbyists or advocacy campaigners were present in Brussels, such as Jean Russetto, a Swiss corporate lawyer with Steptoe & Johnson LLP. Established in Belgium for 40 years, he has represented the interests of the Swiss financial Center in Brussels, where he was known as the “man of the Swiss banks.”

3.3 Lobbying the US

34In the US, according to the Wall Street Journal,164 the Swiss banking industry, has beefed up its Washington lobbying ranks. The Swiss Bankers Association hired Candida P. Wolff, who had been the top lobbyist for President George W. Bush as well as a partner at D.C. law firm Hogan and Hartson. Regarding U.S. financial regulatory matters, Mayer Brown LLP represented the Swiss Bankers Association since 2006, as well as Credit Suisse and 300 other Swiss and foreign banks that operate in Switzerland.

3.4 From PR to Public Diplomacy

35The Swiss Bankers Association’s public affairs specialists also faced significant challenges with Bern and selected cantonal authorities. Apart from traditional PR events, Chairman Patrick Odier and CEO Claude-Alain Margelisch, engaged in extensive communication with all SBA dialogue partners, both publically and behind the scenes, in Switzerland and abroad. In 2010–2011, lobbying efforts were directed at countries and organizations within Europe, especially in France, and also in the USA. There was increased awareness of the need for further communication initiatives in other core markets, generally in cooperation with Swiss embassies, with defined communications strategies.165

36By comparison, and considering the interests at stake, Switzerland’s competitors were somewhat more active and blunt in lobbying. This was partly facilitated by the fact that these countries were members of the organizations they lobbied, and also because diplomatic support provided to industry and services of national interest was more integrated in international policy-making than it was traditionally in Switzerland.

37United Kingdom’s Overseas Territories and Crown Dependencies have been boosting their EU and UK lobbying strength and reputation management on European financial regulation, amidst growing criticism of tax havens. PR firm Media House International has represented the Cayman Islands’ financial services industry lobbyist – Cayman Finance – since April 2009. Business Bermuda, an organization working with Bermuda-resident companies and the government, has also made moves to deflect criticism. It hired financial PR and lobby firm Pelham Bell Pottinger in 2011 to develop and promote Bermuda. Guernsey and Jersey also set up a joint PR office in Brussels in 2011 to protect the Channel Islands’ interests with influencers and decision-makers in the UK. The Government of Guernsey hired a PR director. The Jersey financial services’ sector has its own lobbyist, Jersey Finance, which is part-funded by the Government. The Isle of Man166 hired its first director of European affairs in April 2011, to lobby on behalf of the government, strengthening relations with key decision-makers, promoting the Island’s economic and cultural interests, and gathering intelligence on relevant issues. Five public affairs consultants represent the Isle of Man’s Department of Economic Development and its Chief Secretary’s Office from Lansons, to put forward the Island’s perspective at UK Cabinet level and to senior civil servants. Some MPs are appointed as advisers to “assist with international strategy, ambassadorial work and advising on government and parliamentary aspects of financial services.”167

38Between 2006 and 2011, US financial firms increased their spending into lobbying the US government by 26%, to reach USD 477 million168. Four German financial companies have invested in lobbying the US government in 2011 – Deutsche Bank, Allianz, Munich Re and Deutsche Börse – with a total spending of $4.7 million. Deutsche Bank retains an office with two employees and one assistant in Washington, which inform Deutsche Bank about current legislation and possible effects of regulation. The same year, Goldman Sachs, the best politically connected Wall Street firm spent $6.1 million while Bank of America spent $3.7 million. Goldman Sachs participated in 47 meetings with the US Treasury, Federal Reserve, and CTFC between August 2010 and April 2012. All meetings are logged and published regularly by US financial authorities since the passage of the Dodd-Frank Act. According to the International Monetary Fund, 169 “lobbying by a financial firm on a specific bill increases the likelihood of a legislator shifting position in favor of an industry-friendly bill by 37%”.

39Despite its trusted semi-direct democracy, its institutional checks and balances, Switzerland needs to remain vigilant on different fronts: on one hand policy making must remain subject to the Swiss citizen’s approval; and on the other hand, companies and policy makers must report in detail their particular links and interests as well as their active lobbying activities. Citizens must remain the country’s supreme political authority.

40Lobbying and advocacy require resources and organization. They also require passion and action. The Swiss banking industry has all the imaginable experts available to present their issues to decision-makers; but it remains weak in legislative advocacy. It has trouble setting a strategy to create change, it is often perceived as arrogant and detached from public policy.

41If tax sovereignty and privacy are values political authorities wish to defend, then the banking sector needs to build up its interactions not only with foreign governments but also with nongovernmental individuals and organizations. As contributors to Public Diplomacy, a number of effective tools can be used: media and study trips, distribution of informal material, partnerships, exchange programs, bursaries, support for schools and trips abroad for educational purposes as well as elements of cultural diplomacy.170 As a support to foreign policy, contributing to the understanding of a country's interests, public diplomacy concentrates on building and nurturing long-term contact networks. Unlike the work of the diplomatic service, it does not target other governments and Foreign Offices (State Departments) but rather a broader public, interest groups, domestic constituents, fellow professionals or pressure groups in foreign countries. Actions of public diplomacy can contribute to setting a successful environment for negotiations – as well as contribute to influence domestic constraints in a shrinking win-set.