* Mulling distinction between tax evasion and fraud
* Secrecy still intact and respects privacy
* US, France and Germany piling pressure on Swiss
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By Jonathan Lynn
GENEVA, March 5 (Reuters) - Switzerland is working on how to modify its banking secrecy to make it more acceptable to other countries, looking at the distinction between tax evasion and tax fraud in Swiss law, the finance minister said on Thursday.
Hans-Rudolf Merz, who is also the Swiss president, told reporters that the country's banking secrecy remained intact and that it respected privacy rather than protected fraud.
"The Federal Council is currently considering the question of the distinction made between tax evasion and tax fraud," Merz told reporters, adding that Switzerland would be prepared to negotiate with other countries and consider concessions.
Swiss banks are forbidden by law to divulge information on clients unless it is suspected that a Swiss criminal law has been broken. Under Swiss law, tax fraud is a criminal offense, but tax evasion is not, although it can result in financial penalties.
The Swiss government has come under fire at home after allowing major bank UBS to disclose the identity of about 300 of its U.S. clients to avert criminal charges that Swiss regulators said would have put its existence at risk and hurt the economy.
U.S. tax authorities continue to pursue a civil lawsuit against UBS, seeking the data of another 52,000 Americans it says are hiding about $14.8 billion in assets in secret Swiss bank accounts.
Switzerland is the world's biggest offshore financial centre, managing nearly one-third of an estimated $7 trillion in offshore wealth. Bankers have warned that the financial sector would shrink by as much as half without bank secrecy.
Tax authorities are chasing undeclared wealth that is stashed abroad in a global crackdown on tax cheats, and in the process, are getting tough with secretive private banking sectors in places like Switzerland, Luxembourg, Austria and the Channel Islands.
France and Germany this week piled on more pressure, proposing new steps against non-cooperative tax centres and calling for a revised set of criteria to determine whether Switzerland should be added to the list.
"In yet another fallout from the financial crisis that has beset the world, Switzerland may have to re-examine the way that its wealth management businesses operate," said analyst Susan Ellis at Datamonitor.
EVASION OR FRAUD?
Swiss government is working on ways to modify banking secrecy and not dismantle it, Merz said, echoing comments by UBS's chairman-designate and former Swiss finance minister, Kaspar Villiger.
Swiss justice minister Eveline Widmer-Schlumpf has already raised the prospect of changing the distinction between tax evasion and fraud.
"In the discussions on the federal level and the expert commission, we will have to think about whether we should treat severe tax evasion like tax fraud," she said in a television interview, but denied it meant a weakening of bank secrecy.
Patrick Odier, a senior partner at Geneva private bank Lombard Odier, said there was general pressure to find an international consensus on how to stop tax evasion. Odier said that Switzerland must take part in an international review and be more active than it has in the past.
"Let's not reduce the defence of bank secrecy to defending this distinction between fraud and tax evasion. Bank secrecy is above all the confidentiality of the private sphere," Odier was quoted as saying by Swiss weekly l'Hebdo.
"Bank secrecy remains an economic asset which is neither amoral nor particularly original, by the way, if you look at practices by other financial centres." (Additional reporting by Stephanie Nebehay and Sam Cage in Zurich; editing by Will Waterman)