Swiss banks must clamp down on money laundering, the country's financial watchdog said on Thursday as the Geneva prosecutor opened a criminal probe after a massive document leak showed how offshore companies are used to stash clients' wealth.

Four decades of documents from Panamanian law firm Mossack Fonseca, which specialises in setting up offshore companies and has offices in Zurich and Geneva, showed widespread use of those instruments by global banks and triggered investigations across the world.

"Do I think we are where we should be in fighting misuse in the financial system? No," Finma chief executive Mark Branson told Reuters following its annual news conference.

"We think in some ways the risks in Switzerland have risen, not fallen, and that there is more that can be done. We don't want to see large scandals involving Swiss banks."

Switzerland is the world's biggest international wealth management centre with around $2.5 trillion in assets and has taken on more wealth of late from emerging markets, from which it is harder determine the origin of assets, Branson said.

The "Panama Papers" investigation has exposed financial arrangements of public figures including friends of Russian President Vladimir Putin, relatives of the prime ministers of Britain, Iceland and Pakistan, and the president of Ukraine.

Branches of Swiss lenders including UBS and Credit Suisse were mentioned in the leaked documents as being among the main banks that requested offshore companies for clients. Both banks have denied wrongdoing in connection with the practice.

Swiss financial institutions -- a focal point of ongoing efforts by European governments to crack down on tax avoidance -- trailed only Hong Kong in having used Mossack Fonseca, the reports have said.

Branson said Finma would first check for signs of illegal activity before deciding whether to launch an investigation linked to the Panama Papers. There were a few indications that they may be relevant in Switzerland, Branson said.

GENEVA PROBE

Geneva's prosecutor also said on Thursday he had launched a criminal inquiry in connection with leaks that revealed many offshore companies set up by lawyers and institutions in the Swiss lakeside city and financial centre.

"Some information has been made public this week and the prosecutor's office wanted to verify if this information showed anything that was against the law," a spokesman for the prosecutor said.

One prominent Geneva lawyer helped set up 136 Panama offshore companies, Swiss television has reported.

"Yes, it is an industry with a legal dimension. I have been in this business for 30 years and this activity was sought after by foreign nationals. There is nothing illegal, illicit or perception of criminality to it," another Geneva lawyer, Francois Canonica, said on Swiss television on Wednesday night.

Canonica, a former head of the Geneva bar association, referred to a period after the 1981 election of French President Francois Mitterrand, which he said drove French fearful of nationalisation to place their money in offshore Swiss accounts.

Credit Suisse CEO Tidjane Thiam said on Tuesday his bank was after only lawful assets.

UBS said on Monday it conducted its business in full compliance with applicable law and regulations and that it had no interest in funds that are not taxed or derive from unlawful activities.

Branson said a number of Swiss banks were implicated in a corruption scandal surrounding Brazil's Petrobras and suspicious cash flows linked to the Malaysian sovereign fund 1MDB.

Finma has launched four enforcement proceedings against institutions in the 1MDB case and three over Petrobras.

Branson said: "There are concrete indications that the measures those banks had in place to combat money laundering were inadequate."  - Reuters