By Philip Pullella
VATICAN CITY (Reuters) - The Vatican, whose bank has been embroiled in a money-laundering scandal, said on Friday it had adopted laws to comply with international standards on financial crime.
The Vatican Bank, founded in 1942 by Pope Pius XII, was in the spotlight last September when Italian investigators froze 23 million euros ($32.55 million) in funds in Italian banks after they opened an investigation into possible money laundering.
The bank says it did nothing wrong and was just transferring funds between its own accounts. The investigation is continuing.
The Vatican said the wide-ranging law, which came into effect at midnight, marks the biggest action by the Vatican to meet international demands for more financial openness.
"This is an event of great legal importance which has wide moral and pastoral significance," the Vatican said in a statement.
The law, which was ordered by Pope Benedict last year, sets up internal regulations to see to it that its bank -- officially known as the Institute for Words of Religion (IOR) -- and all other departments adhere to international regulations and standards and cooperate with foreign authorities.
Vatican City, a 108-acre sovereign state surrounded by Rome, now complies with the rules of the Financial Action Task Force (FATF), a Paris-based body that lists states failing to comply with standards on money laundering and terrorism financing.
It has established an internal Financial Information Authority along the lines of other countries and has committed to comply with international anti-money laundering standards and liaise with the group and law enforcement agencies.
The Vatican expects to secure an entry in the Organization for Economic Cooperation and Development's "White List" of states complying with international standards against tax fraud.
Vatican employees suspected of violating the norms will be investigated by its FIA and judged by Vatican tribunals, but would serve any prison time in Italian jails, in accordance with standing agreements between Italy and the Vatican. Money laundering would be punishable by up to 12 years in prison.
Anyone entering or leaving the Vatican with more than 10,000 euros in cash is now obliged to declare it with Vatican police at the "border" that separates it with Italy.
The new law affects all Vatican departments. This means offices such as its missionary arm, which handles tens of millions of dollars a year, will be subject to stringent regulations and oversight.
Last year, Italian magistrates began an investigation of Cardinal Crescenzio Sepe, former head of the missionary arm, on suspicion of corruption in the sale of a building in Rome owned by the department. He has denied all wrongdoing.
The Vatican has said the new law would make all its institutions less vulnerable to misuse.
In 1982, the IOR, which manages funds for the Vatican and religious institutions around the world, was caught up in the fraudulent bankruptcy of Banco Ambrosiano, then Italy's largest private bank, whose president Roberto Calvi was found hanged under London's Blackfriars Bridge.
Several investigations failed to determine whether Calvi, known as "God's Banker," killed himself or was murdered. The Vatican denied any responsibility for the collapse of the Banco Ambrosiano, in which it held a small stake, but made a "goodwill payment" of $250 million to creditors.
(Editing by Michael Roddy)