DECEMBER 31, 2010

http://online.wsj.com/article/SB10001424052970204304204576051241293729776.html

VATICAN CITY—The Vatican created a watchdog to supervise financial transactions and new laws against financial crimes, capping a yearlong effort by the Holy See to join other sovereign states in cracking down on money-laundering and terror financing.

The measures, which come as Vatican bank officials are under investigation in an Italian money-laundering probe, are intended to improve transparency at the Holy See's bank.

"This is a very important step in a long path towards transparency and legality," Father Federico Lombardi, the Vatican's spokesman, told reporters.

The new Authority for Financial Information will monitor all Vatican institutions—including its bank, pharmacy and supermarket—for possible crimes including terrorism financing, stock-market violations and insider trading, according to an apostolic letter published Thursday on the Vatican's website.

The Authority will be able to investigate and prosecute violators in accordance with Vatican law. Its chairman will be appointed by the pope and serve for five years, the Vatican said. Details on how the watchdog will operate and monitor transactions are still being ironed out, Father Lombardi said.

A new Vatican would also aim to counter fraud and counterfeiting on euro bank notes and coins.

In December 2009, the Vatican entered an agreement with the European Union expanding the value of euros that the 110-acre city state is authorized to mint and circulate. Since late 2009, Vatican officials have been working to get the city state in line with international financial norms.

Ettore Gotti Tedeschi, chairman of the Vatican's bank, the Institute of Religious Works, known by its Italian acronym IOR, met with executives at the Organization for Economic Cooperation and Development in July to discuss creating a financial regulatory body.

The efforts accelerated after September, when Italian prosecutors announced that they had put Mr. Gotti Tedeschi and the IOR's director general under investigation for alleged noncompliance with Italy's anti-money-laundering rules.

Neither Mr. Tedeschi nor the IOR's director general has been charged in the probe. Both denied wrongdoing.

Mr. Gotti Tedeschi has said the bank operates with "absolute transparency." The Vatican has called the probe the result of a "misunderstanding" between the bank and Italian authorities.

As part of the investigation, prosecutors are trying to determine whether IOR clients used Vatican bank accounts to transfer funds to Italy from Vatican City, which is outside the jurisdiction of Italian financial regulators, according to a person close to the probe.

For years, the IOR has transferred funds to its accounts at other banks on behalf of its clients without fully disclosing those clients' identities. In 2007, however, Italy introduced tougher disclosure laws, requiring banks to list the names of people who receive funds from IOR accounts and the reason for the transaction.

Officials at the OECD couldn't be reached to comment.

The new measures are part of the Holy See's "efforts to build a just and honest social order," the Holy See said. "At no time may the great principles of social ethics like transparency, honesty and responsibility be neglected or weakened."