Pope's bankers in money laundering probe
Officials in Rome are investigating the head of the bank, Gotti Tedeschi, and its chief executive Paolo Cipriani over non-disclosure of information relating to financial operations.
Prosecutors have seized 23m Euros (£19m) from the bank's accounts following a tip-off last week – a move the Vatican described as "astonishing".
The Bank of Italy's financial intelligence unit tipped off the Italian police last week, said the BBC, following reports of 'suspicious transactions' between the Vatican Bank – officially known as the Institute for Religious Works (IOR) – and two other Italian banks.
The seizure was made after the Vatican Bank attempted to transfer 20m Euros from Credito Artigianato to JP Morgan in Frankfurt, plus a further 3m Euros to Banca del Fucino.
In a statement, the Vatican was characteristically defiant.
"The Holy See is perplexed and astonished by the initiatives of the Rome prosecutors, considering the data necessary is already available at the Bank of Italy," it said.
Reports claim that the Vatican Bank had refused to inform the authorities of the origins of the money.
"The Holy See wants to express the maximum confidence in the president and in the chief executive of the IOR," it added.
Tedeschi, the former head of Santander's Italian operations, is also a professor of financial ethics.
The Vatican Bank, which was restructured during World War II to service the accounts of religious orders and individuals, is no stranger to scandal.
In 1982 its governor, Archbishop Paul Marcinkus, was linked to the collapse of Italy's largest private bank, Banco Ambrosiano, in which it was a major shareholder. The Vatican was granted immunity from investigations that followed.
In June, two of Ambrosiano's directors, including its chairman Roberto Calvi, were murdered. Calvi, who was found hanging under Blackfriars bridge, was known as God's Banker because of his close ties to the Vatican.
Two years later, IOR paid $244m to Ambrosiano's creditors in exchange for the dropping of further claims against the Vatican, which continued to deny any foul play.
The following decade the bank was implicated, and later acquitted, during the so-called Enimont corruption trial.
IOR, which does not publish its accounts, is believed by bankers to hold assets of some $5bn, according to the Financial Times. Its profits are used for charity-related work.
The latest revelations come just days after the Pope's visit to Great Britain, which was mired by the fallout from suspected paedophilia by Catholic priests. The Pope's visit was estimated to cost UK taxpayers almost £15m.
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