Switzerland's financial regulator FINMA will shortly draw up rules setting out the conditions under which banks can manage funds of foreign clients that have not been declared for tax, it said on Saturday.

The aim of the directive on undeclared funds is to enable the country's multi-trillion-dollar wealth management industry to work without risk in foreign markets, FINMA director Patrick Raaflaub was quoted as saying.

We haven't yet launched work on a draft directive of this kind but it will not be long before we do, he said in an interview in the Swiss daily Le Temps.

A solution to this problem must be found this year to allow banks to be able to work again on their traditional foreign markets where the risks have increased greatly.

Raaflaub said the details of the mechanism had not yet been decided and could involve a withholding tax or some other system to ensure that the money was seen as fiscally clean.

Swiss officials argue that Swiss banks cannot police their foreign clients' accounts on behalf of foreign tax authorities, but Switzerland has been forced to water down its banking secrecy rules and approach to tax evasion under pressure from the United States, Germany and other countries.

Switzerland and Germany agreed a double-taxation agreement on Friday as part of Swiss efforts to ensure that Switzerland is not viewed as an illegitimate tax haven.

(Reporting by Jonathan Lynn)