- Associated Press - Thursday, December 30, 2010

VATICAN CITY (AP) — The Vatican on Thursday created a financial watchdog agency and issued new laws to fight money laundering and terrorist financing in a major effort to shed its image as a tax haven that for years has been mired in secrecy and scandal.

The decrees, which go into effect April 1, were passed as the Vatican’s own bank remains implicated in a money-laundering investigation that resulted in 23 million euros ($31 million) being seized and its top two officials placed under investigation.

The bank, formally known as the Institute for Religious Works, or IOR, is one of several Vatican offices that are covered by the new financial transparency rules. The Vatican city-state’s governing administration, the department that controls the pope’s vast real estate holdings and even the Holy See’s pharmacy, museum and TV station are covered as well.

The bank was created to manage assets placed in its care that are destined for religious works or works of charity. But it also manages ATMs inside Vatican City and the pension system for the Vatican’s thousands of employees.

The bank is not open to the public. Its list of account-holders is secret, but bank officials say there are some 40,000 to 45,000 among religious congregations, clergy, Vatican officials and lay people with Vatican connections.

Pope Benedict XVI, who wrote an entire encyclical on the need for greater morality in finance, said he was issuing the decrees because he wanted the Vatican to join other countries that have cracked down on legal loopholes that have allowed criminals to exploit the financial sector.

International financial organizations, which have been working with the Vatican to help it come into compliance with their norms, said Thursday it appeared the Holy See had taken a step in the right direction.

The decree creates an independent Vatican compliance agency, the Financial Information Authority, tasked with ensuring that all Vatican financial transactions comply with the new laws. The watchdog also will share information with international financial organizations, a big shift for the notoriously private Vatican financial system.

It can freeze suspect transactions for up to five days and can conduct investigations that, if warranted, can be passed onto prosecutors at the Vatican tribunal. Its work is conducted in secret — but the norms stress that secrecy won’t get in the way of cooperating with law enforcement agencies.

The legislation adopted alongside the new watchdog agency is remarkable reading, given that it concerns a city-state of 110 acres that is the seat of the Roman Catholic Church.

It’s now against the law in the Vatican to train anyone for terrorist acts or to provide them with chemical or bacteriological weapons. Punishment is stiff: five to 10 years in prison — in this case an Italian prison since the Vatican doesn’t have a jail.

People in the Vatican who traffic in human beings, for prostitution or other reasons, or who traffic in human organs, now face eight to 20 years behind bars. It’s now even a crime to pollute the Vatican’s soil, water or atmosphere; those guilty face up to a year in prison, or two and 52,000 euros ($69,044) in fines if the pollutants are particularly dangerous.

But it is the legislation directly concerning financial transparency that is key to the Vatican’s efforts to comply with international norms on money-laundering and terror financing and shed its reputation in the financial world as a secrecy-obsessed tax haven whose bank was implicated in one of Italy’s largest fraud cases.

The Vatican had pledged to pass such legislation by Friday, the last day of 2010, when it entered into a monetary agreement with the EU in December 2009 concerning the issuance of euros.

The effort, though, went into high gear following the money -aundering probe, which greatly embarrassed the Vatican and its bank chairman, economist Ettore Gotti Tedeschi.

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