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VATICAN CITY (Reuters) - A European report on Wednesday identified serious failings in the Vatican's scandal-plagued bank, sharply criticizing its management and giving the Holy See a negative rating in almost half the most important transparency-related criteria.
The milestone report, by Moneyval, a department of the Council of Europe, suggests the Vatican still has a long way to go before it can be included on an international "white list" of countries that abide by global norms on combating money laundering, the financing of terrorism and tax evasion.
The Vatican said it saw the 241-page report as a constructive starting point that would allow it to improve its financial controls rather than as a conclusion.
"We take both the praise and the criticism contained in the report with seriousness," said Monsignor Ettore Balestrero, who headed the Vatican team that worked with the report's authors.
The report comes at a time when the Vatican is battling to limit the fallout from a corruption scandal with Pope Benedict's butler suspected of leaking sensitive documents that allege wrongdoing in the Vatican's business dealings with Italian companies.
It was particularly pointed in its criticism of the management of the Vatican bank, officially known as the Institute for Works of Religion (IOR), and "strongly recommended" it be "independently supervised by a prudential supervisor in the near future".
Lack of independent supervision posed "large risks to the stability" of the Holy See's financial sector, the report said, an apparent suggestion that the bank should be fully independent of a committee of five cardinals who currently oversee it.
Senior management at the IOR lacked "fit and proper criteria", it added.
The IOR, whose tellers work under the gaze of crucifixes, is being investigated by Italian magistrates looking into money laundering. The bank is housed in the 15th-century Tower of Nicholas V, which Pope Benedict can see from his apartment windows.
The report did say that the Vatican had "come a long way in a short period of time" in making reforms and that many of the "building blocks" to combat money laundering were in place, even though more had to be done before it could join the international club of financial righteousness.
In 2010, Rome magistrates froze 23 million euros ($33 million) that the IOR held in an Italian bank. The Vatican said at the time that its bank had done nothing wrong and was merely transferring its own funds between its own accounts in Italy and Germany. The money was released in June 2011, but the investigation is continuing.
In a dramatic twist, the IOR's former president, Italian Gotti Tedeschi was ousted in a boardroom battle on May 24. He said he was fired because he wanted the bank to be more transparent, but the Vatican said he was an obstacle to transparency.
He was ousted a day after the arrest of the pope's butler, Paolo Gabriele, who has been held in relation to the leaking scandal in a small "safe room", in the Vatican's police station, where he prays daily. He was denied house arrest last week.
The Vatican has been trying to shed its image as a suspect financial centre since 1982, when Roberto Calvi, an Italian known as "God's Banker" because of his links to the Vatican, was found hanging from London's Blackfriars Bridge.
Although Vatican officials say they are determined to improve financial transparency in order to qualify for inclusion on the global white list, Wednesday's report showed they have their work cut out.
It awarded the Vatican negative grades of "partially compliant" or "non compliant" on seven of the 16 so-called core and key recommendations, while handing out grades of "compliant" or "largely compliant" on the other nine.
The seven negative grades included insufficient customer due diligence, insufficient compliance on reporting of suspicious transactions, and insufficient supervision and monitoring.
"There are seven areas where the Holy See must and will focus on," Balestrero said.
Moneyval, "The Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism", is a monitoring mechanism of the 47-nation Council of Europe that tries to ensure that member states comply with international financial standards.
Moneyval does not maintain its own "white list", but supplies information which could eventually be used by other organizations, such as the Financial Action Task Force (FATF), to determine whether the Vatican belongs on a "black" or "grey" list of countries that fail to measure up.
Any such decision is at least a year away, and would depend on a follow-up evaluation of how well the Vatican implements recommendations in Wednesday's report.
Balestrero said the Vatican would try to implement all the recommendations contained in the seven negative scores before the progress report.
The Moneyval evaluation, which the Vatican requested several years ago, grades a country against 49 recommendations, of which 16 are deemed "core and key".
It is not uncommon for countries to receive partially compliant or non-compliant marks on their first and even subsequent evaluations, accompanied by suggestions on how to improve.
Vatican sources compared the performance to Italy, which they said had five non-compliant or partially compliant marks on "core and key" recommendations in a 2005 evaluation, years after it began its evaluation process by FATF.
In 2010, the Vatican drafted new financial transparency laws and set up internal regulations to make sure its bank and all other departments that administer the Catholic Church around the world adhered to international standards on money laundering and terrorism financing.
As part of the new legislation, the Vatican established an internal Financial Information Authority (FIA) along the lines of other countries and promised to liaise with the FATF and law enforcement agencies.
But the Moneyval report said there was "lack of clarity about the role, responsibility, authority, powers and independence of the FIA as a supervisor".
The IOR's most infamous scandal involved the collapse 30 years ago of the Banco Ambrosiano, with lurid allegations about money-laundering, freemasons, mafiosi and Calvi's mysterious death.
The IOR held a stake in Ambrosiano, then Italy's largest private bank, and investigators alleged that it was partly responsible for its fraudulent bankruptcy.
The IOR denied any role in the collapse, but paid $250 million to creditors in what it called a "goodwill gesture".
Several investigations have failed to determine whether Calvi killed himself or was murdered.
Here is a factbox on the Vatican's bank:
Reporting By Philip Pullella; Editing by Andrew Osborn