The report by the American State Department’s International Narcotics Control Strategy lists the Holy See as one of 68 countries including Yemen, Algeria and North Korea, describing it as a “country of concern” for money laundering or other financial crimes.
Officials said they had placed the Vatican on its watch list because of the “huge amount of cash” that flows into the tiny city state and also because it was still unclear how effective anti-money laundering legislation introduced last year by Pope Benedict XVI had been.
The news comes just weeks after a series of leaked documents from within the Vatican – dubbed “Vatileaks” – revealed allegations of corruption and money laundering which forced officials into issuing a series of denials.
The documents claimed there was a massive loophole which made it impossible to take action against any offence committed before its introduction on 1 April 2011.
Prosecutors are investigating two transfers totalling €23 million (£19.3 million) from the Vatican Bank, the Institute of Religious Works to give it its proper name, to two smaller banks.