A spokesman for the Prosecutor's Office, Hansjurg Mark Wiedmer, said Friederich had made deposits worth 1.25 million Swiss francs (US$750,000) into bank accounts in Luxembourg during the second half of 2001.

The spokesman said Friederich had falsified the documents relating to the deposits, claiming the money had come from the sale of private goods to an acquaintance. Friederich also admitted to falsifying the signature of the alleged buyer, it is claimed. However, Wiedmer added that the circumstances surrounding the transaction remained unclear, namely the origin of the money.

Friederich's lawyer, Jean-Rene Mermoud, said yesterday that his client had been set up by the Luxembourg authorities, who denounced him to prove to the European Union that the country was serious about cracking down on money laundering.

The Luxembourg authorities told the Swiss last February about an alleged money-laundering case, although it appears that at first Friederich's name was not attached to the tip-off. As further details emerged, the ambassador became implicated.

The term 'money-laundering' in Swiss usage would clearly refer to the handling of money resulting from criminal activity, not including tax evasion. The Prosecutor's Office originally said it had opened its investigation against Ambassador Friederich based on Article 305 of the Swiss Penal Code, which imposes reporting obligations on financial intermediaries, including lawyers and brokers, who become aware that funds may be the proceeds of criminal activity.

The 60-year-old Friederich was ambassador to Vietnam and Cuba before taking up his post in Luxembourg in December 1999. He had worked for the foreign ministry since 1971.