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* Settlement sparks backlash from smaller banks
* Up to 50 Swiss bankers could still face charges - union
* Draft law comes before parliament in June
By Katharina Bart
ZURICH, May 31 (Reuters) - The unified front with whichSwitzerland's banks have defended their culture of secrecy isbreaking down as some prepare to hand over data in a U.S. taxevasion probe, leaving others at greater risk of prosecution.
The Swiss government is trying to push through a law thatwould allow banks to release the information on clients, helping13 banks under formal investigation to avoid criminalprosecution including Credit Suisse and Julius Baer.
Although the move could deal a further blow to Switzerland'swaning status as a discreet parking house for undeclared wealth,the government hopes it will head off more determined action byU.S. prosecutors.
But some banks not named in the investigation, along withthousands of tax lawyers, custodians and small asset managers,fear the government is hammering out a deal that ignores theirconcerns and leaves them exposed to potential criminal lawsuits.
"This isn't a deal at all," said the Swiss Association ofAsset Managers in a statement. "Swiss banks which have sinnedare buying forgiveness by denouncing the independent assetmanagers, custodians, and lawyers they worked with in order toavoid being criminally prosecuted."
The investigation is focusing for now on the 13 Swiss bankssuspected of abetting tax evasion by American citizens, butindustry experts say as many as 80 financial institutions couldface charges.
This would suggest an industry-wide response is needed toensure smaller players do not collapse under onerous U.S. finesor career-destroying criminal sentences.
At first the industry tactic was to strike individual dealswith U.S. authorities, beginning with private banking giant UBS, which agreed a landmark $780 million settlement in2009 that involved handing over information that enabledAmerican officials to pursue other Swiss institutions.
That became less tenable when the investigation took in agrowing number of banks, including British bank HSBC's Swiss arm, privately held Pictet in Geneva and smaller playerssuch as LLB's Swiss unit and local government-backedZuercher Kantonalbank and Basler Kantonalbank.
"NO LEGAL CERTAINTY"
Swiss banks had found themselves barred by Swiss law fromcooperating with U.S. prosecutors and have been mostly pullingout of the U.S. private client business.
Credit Suisse welcomed the new legal framework announced onWednesday - the 13 banks hope it will end years of legalwrangling that has already driven one bank out of business.
They still face a share of fines that could total $10billion, according to sources familiar with the talks.
The bill caps two years of efforts by the Swiss governmentto resolve the tax dispute. It wants to push through thelegislation in June for fear that U.S. authorities could bringcriminal charges against large banks and open new probes intomany others.
But a risk of criminal sentences for people and institutionsnot covered by the pending settlement will remain. Switzerlandhas roughly 35,000 tax lawyers, financial custodians and othergroups supporting a financial industry that generates 6 percentof the Alpine nation's gross domestic product.
"There is no legal certainty in any of this. Who is going toagree to something they know nothing about, except that it willcost an arm and a leg?," said one Zurich-based small assetmanager on condition of anonymity.
The extent of Washington's resolve in pursuing cases beyondthe banks themselves became clear last month when U.S.authorities charged Edgar Paltzer, a Swiss attorney and partnerwith venerable Zurich law firm Niederer Kraft & Frey, withhelping American clients hide millions of dollars in offshoreaccounts to avoid paying taxes.
Banks also fear criminal action against their own employeesonce data on staff who handled U.S. accounts are turned over toAmerican officials.
The divisions exposed by the settlement show through incomments from the Swiss banking lobby, which represents 347firms. It urged the government to "find a solution that standsin proportion to the transgressions being alleged".
A union representative for Swiss bank employees toldThursday's Tages-Anzeiger newspaper that U.S. officials couldcharge as many as 50 Swiss bankers in an initial phase.
Some industry experts agree the draft law is unappealing tobanks not directly involved in the probe, yet insist it is stillpreferable to no deal at all.
Looking further out, the damage to the Swiss reputation forbanking discretion, consistency and reliability is harder toassess.
"Legal certainty is extremely important for clients, andthey aren't getting that with this deal," said Alexandre Zeller,former head of HSBC's Swiss arm and now chairman of the Swissstock exchange.
