* Voluntary approach seen as best - government officials
* Government due to publish inquiry on sector by March
* NGOs warn of policy gaps in Switzerland
By Emma Farge
BERNE, Jan 18 Swiss officials said commodities companies should voluntarily police themselves, rather than face legally binding rules, as the government ponders its first set of national transparency measures for the $20 billion sector.
Switzerland has come under pressure by other western countries to close regulatory gaps, but many fear that strict rules could harm the traditionally secretive business that now accounts for nearly 4 percent of Swiss gross domestic product.
Geneva-based firms such as Vitol and Trafigura handle around a third of global trade in crude oil by volume, and Swiss firms also play a major role in the grains and metals markets. Canny traders want to avoid revealing their strategies in highly competitive markets.
"I think the most effective way is to work with companies and come up with voluntary principles," Yves Rossier, the secretary of state at the Swiss foreign ministry, said on Thursday.
Rossier's comments come ahead of the outcome of a government probe, nine months in the making, after politicians raised questions about transparency and risks of corruption in the commodities business.
Switzerland, keen to avoid being stigmatised as a tax and secrecy haven after U.S. criticism of its banks, launched the inquiry last May and is set to provide guidance for legislators.
The Swiss cabinet in December rejected a motion, backed by 30 politicians, that would have forced mining companies and private commodity trading houses to declare any payments made to resource-rich countries.
Marie-Gabrielle Ineichen-Fleisch, a director of the Swiss Economics Ministry (SECO) which is working on the report, also favoured non-binding rules.
"If we can show that voluntary measures lead to a solution, then that is better," she said in a debate in Berne on Thursday organised by non-governmental organisation (NGO) SwissAid.
MIND THE GAP
The voluntary approach is likely to disappoint the European Union, which in September voted through a draft anti-corruption law. A U.S. regulator in August set demanding rules for U.S.-listed firms.
European Parliament member Arlene McCarthy, who led the discussions in Brussels ahead of the September vote, has urged Switzerland to pass similar measures.
In a letter addressed to former Swiss President Eveline Widmer-Schlumpf on Nov. 20 and seen by Reuters, McCarthy said there was a need for a "level playing field" in the sector and called Swiss legislation an "essential step towards a global transparency standard".
NGOs such as Switzerland's the Berne Declaration said the voluntary approach would not be sufficient.
"As a state you always have regulation to govern every industry, and with this complex business I don't see how you can say it's unnecessary. The voluntary approach is what companies have done for decades and it hasn't worked," said Urs Rybi of the Berne Declaration.
Switzerland last July launched an investigation into a former employee of Gunvor for suspected money laundering in the Republic of Congo's oil sector. Gunvor said it was not itself subject to investigation.
Rossier said that voluntary rules could prove to be more effective.
"When you adopt regulation there is a tendency to think the job is done and then to sit on your hands and move onto something else," he said.
Stephane Graber, secretary general of the Geneva Trading and Shipping Association, urged legislators to avoid putting the Swiss trading hub at a competitive disadvantage to other major hubs such as Singapore and London.
"Let's not forget that this is about competitive transactions. This needs to be international, because otherwise Switzerland will be the only one applying the rules," he said.
Another concern is cost, he said, adding that small trading houses could struggle with additional charges involved with complying with new Swiss legislation.
Switzerland, which is not an EU member, does not always follow EU guidance on regulating the sector, such as last year when it voted not to pass an embargo on Iranian oil. (Editing by Jane Baird)