Vatican sets up finance watchdog

The Vatican has created a financial watchdog agency and issued new laws to fight money laundering and terrorist financing in a major effort to shed its tarnished image.

The decrees, which go into effect on 1 April, were passed yesterday as the Vatican's own bank remains implicated in a money-laundering investigation that resulted in €23 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, which were adopted to comply with European Union norms.

The bank was created to manage assets placed in its care that are destined for the Pope's religious or charitable works. 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 and its list of account-holders is secret. But bank officials say there are some 40,000-45,000 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.

The decree creates an independent Vatican compliance agency, the Financial Information Authority, tasked with ensuring all Vatican financial transactions comply with the new laws.

The watchdog will also share information with international financial organisations, a big shift for the notoriously private Vatican financial system.