VATICAN CITY — Amid a judicial investigation into its famously secretive bank, the Vatican created its own financial watchdog on Thursday and issued sweeping and tough new laws aimed at meeting international standards against money laundering and terrorist financing.
In an apostolic letter dated Thursday, Pope Benedict XVI created a new internal body to make sure the Vatican’s disparate financial entities comply with European Union standards of financial transparency. The new law answered implicit and explicit criticism that the Vatican’s financial self-regulation has long been too loose, setting stiff penalties—including jail time and monetary fines—for any violators.
The law, to go into effect by April 1, was greeted positively by anti-money-laundering organizations. In a year in which a sexual abuse scandal fomented intense debate over who has the power—moral or otherwise—to hold the church accountable for its actions, the new law appeared to acknowledge the importance of adhering to civil standards.
It was also seen as a victory by Benedict over factions in the hierarchy who would prefer to defend the Vatican’s sovereignty, versus those who wanted more openness. But the test will be how the new law is put into practice—especially by the Vatican bank, which has periodically come under sharp scrutiny and is now the target of a money laundering investigation.
“A few years ago, an anti-money-laundering law in the Vatican and the Holy See would have been unthinkable,” said Gianluigi Nuzzi, the author of the 2009 best seller “Vatican S.p.A.,” which documented the Vatican Bank’s involvement in a host of some of Italy’s biggest fraud cases and political mysteries. (S.p.A. stands for joint-stock company in Italian.) “They used to say, ‘We’re a sovereign state; these are our affairs,’ ” he said.
“The important thing is that they created an anti-money-laundering law and an authority to enforce it,” Mr. Nuzzi said. “Without that, the Vatican Bank will remain an offshore bank.” Still, he added, “now we have to see how it becomes operational to avoid the errors of the past.”
In September, Rome magistrates seized $30 million from the Vatican bank and placed its chairman, Ettore Gotti Tedeschi, and director general, Paolo Cipriani, under investigation for failure to disclose adequate information about two money transfers to two accounts it held.
Two judges have subsequently upheld the seizure, the latest one saying the bank had not sufficiently explained the provenance and purpose of the funds. The Vatican bank maintains that the investigation is the product of a misunderstanding, and that it was sending funds between its own accounts. Italy’s highest court is expected to rule on whether to release the funds.
The Vatican spokesman, the Rev. Federico Lombardi, said the new norms were not directly in response to the investigation.
Asked whether the law would require the Vatican bank to explain the origin and purpose for funds it transferred, Father Lombardi said the law was meant to prevent “the types of problems” that the bank had faced in the past. “This is a first step,” he said.
The new law emerged from continuing negotiations instigated by the Vatican with the Paris-based Financial Action Task Force over joining the so-called white list of countries with good records on financial transparency. The Vatican had pledged to pass such a law by the end of 2010 as part of a 2009 monetary accord with the European Union that allows it to use the euro as its currency.
In an e-mail message, Rick McDonell, the executive secretary of the task force, called the new legislation “a positive development.”
Mr. Gotti Tedeschi has also been working to get the Vatican included on the Organization for Economic Cooperation and Development’s “white list” of countries that share tax information — a badge of transparency — but the Vatican has not yet met all the criteria.
In an e-mail message, Jeffrey Owens, the director of the Center for Tax Policy and Administration of the O.E.C.D., said the new law was “clearly a step in the right direction.”
Thirty years ago, the Vatican bank was involved in a scandal at a large private bank, Banco Ambrosiano, which collapsed after the disappearance of $1.3 billion in loans to companies in Latin America. The Vatican bank denied wrongdoing but paid $250 million to Banco Ambrosiano’s creditors. Banco Ambrosiano’s president was found dead, hanging from a bridge in London.
Under John Paul II, the Vatican bank — the Institute for Religious Works, or I.O.R. in Italian — was a crucial conduit to the East Bloc during the cold war, and its murky practices gave rise to speculation about the source of some funds.
Some wondered what the new law might mean for the Vatican’s ability to operate under repressive governments like those in Cuba or China.
“How will the I.O.R. materially manage to put these norms into effect, especially in places where there are difficult situations with states and particular regimes?” asked Ignazio Ingrao, a Vatican expert at the Italian weekly Panorama. “It will not be easy.”
The pope has yet to name the president or four members of the internal watchdog, the Financial Information Authority. It will answer directly to the pope but have “full autonomy and independence,” the statute said.
Charged with cooperating with European Union agencies and ensuring that all of the Vatican’s financial operations comply with European Union laws, the authority will have the power to freeze suspicious transactions for up to five days, conduct investigations and determine whether to pass them to prosecutors at the Vatican’s own tribunal. Those found to have violated financial reporting norms will be subject to four to 12 years in jail and fines of $1,320 to $19,900.
Significantly, the new law is to extend “to all dicasteries of the Roman Curia and all the organizations and entities of the Holy See wherever it extends its activities”—meaning everything from the Vatican bank and museums to the Congregation for the Evangelization of Peoples, which owns vast amounts of real estate and is now the target of a separate Italian judicial investigation.
Vatican observers said they expected power struggles as different Vatican entities fought to protect their autonomy against queries from the new authority.
In line with other European legislation, the Vatican’s new law prohibits human trafficking, organ trafficking, prostitution, training for terrorist acts or supplying chemical or biological weapons. It also sets fines and jail time for anyone convicted of growing, selling or transporting drugs.
The statute says the new authority will work in secrecy, but that doing so should not pose an obstacle for Vatican employees to respond “when the information requested is necessary for investigations”—although it did not spell out who would determine the necessity.