By Patrick Temple-West

WASHINGTON (Reuters) - The U. S. Justice Department has signed an agreement with the Swiss government to allow some Swiss banks to pay penalties to avoid or defer prosecution stemming from a long-running probe of tax dodging by Americans using Swiss bank accounts.

The settlement programme will apply to about 100 second-tier Swiss banks, provided they agree to disclose certain previous hidden assets of U. S. customers. It will be open only to banks not already under U. S. criminal investigation.

The deal is a step forward in a three-year U. S. effort to pierce the shroud of Swiss bank secrecy, but some details of the programme raise questions about its potential for rooting out U. S. tax evaders, tax lawyers and watchdog groups said.

Under the programme, eligible banks would pay penalties and disclose account information about U. S. customers in order to avoid prosecution, the department said on Thursday.

"The programme's requirement that Swiss banks provide detailed account information will improve our ability to bring tax dollars back to the U. S. Treasury from across the globe," Attorney General Eric Holder said in a statement.

The Swiss government said in a statement the deal provided a framework for cooperation while respecting Switzerland's legal system and sovereignty.

Fourteen Swiss banks already under investigation by U. S. prosecutors are excluded from the programme, the Justice Department said. The programme is not available to individuals.

Some critics of the Justice Department's previous tax crackdown efforts welcomed the settlement programme.

"On the whole it's a pretty strong agreement," said Heather Lowe, director of government affairs at anti-graft watchdog Global Financial Integrity.

Still, the settlement programme has "gaps", specifically whether banks could settle without turning over U. S. client names, Lowe said. "That is definitely one open question here."

STEEP PENALTIES

Under the programme's penalty provisions, a Swiss bank seeking a non-prosecution agreement must agree to a penalty equal to 20 percent of the total dollar amount of all hidden U. S. customer accounts held by the bank on August 1, 2008.

That was roughly when the United States started cracking down on tax avoidance by Americans with secret Swiss accounts.

The penalty amount increases to 30 percent and then to 50 percent, depending on how active a bank was in continuing to open secret accounts for Americans after the crackdown began.

"The fines in particular are at the upper end of legally acceptable and economically bearable levels," said the Swiss Bankers Association (SBA) in a statement.

"It is, however, the sole remaining solution for enabling the banks to resolve the legal problems with the U. S. conclusively, and for creating legal certainty."

The SBA also flagged what it called "certain ambiguities in the programme" which would need to be discussed between the U. S. Justice Department and the banks to enable the banks to implement the programme.

To determine whether or not to participate in the programme, Swiss banks will need to weigh the cost of potential penalties versus the risk of a U. S. prosecution, tax lawyers said.

"It's a choice between two evils," said Walter Boss, a tax lawyer with Poledna Boss Kurer AG in Zurich. "If they don't cooperate with the U. S., the U. S. might indict them."

Wegelin & Co, the oldest Swiss private bank, said earlier this year it would close down following a U. S. indictment.

The programme also requires cooperating banks to tell prosecutors about Americans' assets that left Switzerland and were moved to other tax havens.

Though the Justice Department declined to identify the Swiss banks it is investigating, a number are known to be facing U. S. probes. These include Credit Suisse <CSGN. VX>, Julius Baer <BAER. VX>, the Swiss arm of Britain's HSBC <HSBA. L>, privately held Pictet, and state-backed regional banks Zuercher Kantonalbank and Basler Kantonalbank <BSKP. S>.

Several of these banks have said they are preparing information on client withdrawals as demanded by U. S. investigators, after the Swiss government said it would allow them to circumvent secrecy and privacy laws to do so.

"The U. S.'s goal ultimately is to get untaxed money into the tax system," said Jeffrey Neiman, a former federal prosecutor involved in other Swiss bank investigations who is now in private law practice in Fort Lauderdale, Florida.

"Whether or not this <programme> is going to be a big step is still an open question."

(Editing by Kevin Drawbaugh, Gary Hill, Matthew Lewis, Ken Wills and Mark Potter)

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