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Financial reform at Vatican

Its bank is the subject of a money-laundering probe. The decrees go into effect April 1.

VATICAN CITY - The Vatican on Thursday created a financial watchdog agency and issued new laws to fight money-laundering and terrorist financing in a major effort to shed its image as a tax haven that for years has been mired in secrecy and scandal.

The decrees, which go into effect April 1, were passed as the Vatican's own bank remains implicated in a money-laundering investigation that resulted in 23 million euros ($31 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 primarily to comply with European Union norms. The Vatican city-state's governing administration, the department that controls the pope's vast real estate holdings, even the Holy See's pharmacy, museum, and TV station, is covered as well.

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 about 40,000 to 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.

International financial organizations, which have been working with the Vatican to help it come into compliance with their norms, said Thursday it appeared that the Holy See had taken a step in the right direction.

The decree creates an independent Vatican compliance agency, the Financial Information Authority, tasked with ensuring that all Vatican financial transactions comply with the new laws. The watchdog will also share information with international financial organizations, a big shift for the notoriously private Vatican financial system.

It can freeze suspect transactions for up to five days and can conduct investigations, which, if warranted, can be passed on to prosecutors at the Vatican tribunal. Its work is conducted in secret - but the norms stress that secrecy won't get in the way of cooperating with law enforcement agencies.

The legislation adopted alongside the new watchdog agency is remarkable reading given that it concerns such a tiny city-state - 110 acres - which is the seat of the Roman Catholic Church.

It's now against the law in the Vatican to train anyone for terrorist acts or to provide them with chemical or bacteriological weapons. Punishment is stiff: five to 10 years in prison - in this case an Italian prison since the Vatican doesn't have a jail.

People in the Vatican who traffic in human beings, for prostitution or other reasons, or who traffic in human organs now face eight to 20 years behind bars.

But it is the legislation directly concerning financial transparency that is key to the Vatican's efforts to comply with EU norms on money-laundering and terror financing and shed its reputation in the financial world as a secrecy-obsessed tax haven whose bank was implicated in one of Italy's largest fraud cases.

The Vatican had pledged to pass such legislation by Friday, the last day of 2010, when it entered into a monetary agreement with the EU in December 2009 concerning the issuance of euros.