(Story first filed Sunday. Repeated with no change to text)
* Wednesday report is milestone for Vatican after string of scandals
* Vatican expected to pass more than half of "key and core" requirements
* Progress report due in a year
By Philip Pullella
VATICAN CITY, July 15 A European report on efforts by the Vatican to embrace financial transparency after a series of scandals involving its bank will laud recent reforms but also underscore what remains to be done to reach international standards in all areas.
According to people familiar with the still-secret report, due to be issued on Wednesday by a department of the Council of Europe, the eagerly anticipated evaluation will give the Vatican an overall passing grade in key areas but criticise others.
The report is by Moneyval, "The Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism", which is the Council's monitoring mechanism that ensures that member states comply with international financial standards.
The external evaluation and recommendations are a milestone for the Vatican, which 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, died under mysterious circumstances.
It comes less than two months after the former president of the Vatican bank, officially known as the Institute for Works of Religion (IOR), was ousted in a dramatic boardroom showdown over the running of the bank, which Italian magistrates are still investigating over money laundering charges the Vatican denies.
The rigorous evaluation, which the Vatican requested several years ago, is made up of 49 recommendations, many interrelated, each rated according to levels of compliance: non-compliant, partially compliant, largely compliant, or compliant.
Essentially, compliant and largely compliant are "pass" grades and partially compliant and non-compliant are "fail" grades indicating more work has to be done in a specific areas.
Sixteen of the 49 recommendations are known as "key and core", and include subjects such as criminalisation of money laundering, confiscation of laundered property, customer due diligence and suspicious transaction reporting.
The Vatican is expected to pass on about nine and receive around seven "partially compliant" or "non-compliant" marks, something which one source said was "good news" considering that it only enacted its financial reform legislation less than three years ago.
"Our intention is to be transparent and to become increasingly more so," one Vatican official said.
It is normal for countries to receive partially compliant or non-compliant marks on their first and even subsequent evaluations, accompanied by suggestions on how to improve, review of past evaluations shows.
Italy, for example, had five non-compliant or partially compliant marks, effectively failing grades, on "key and core" recommendations in a 2005 evaluation, years after it began the initial process.
The Moneyval report on the Vatican has a 12-page summary and categories are sub-divided into topics such as legal systems, preventive measures, and international cooperation.
Nine of the 49 recommendations are called "special recommendations" that have to do specifically with the fight against international terrorism and some of the nine are also part of the group of 16 "key and core" ones.
They include topics such as the implementation of United Nations instruments, the freezing of terrorist assets, and the reporting of suspicious transactions.
The report is expected to recognise specifically the progress the Vatican, the world's smallest state, with around 500 residents, has made notwithstanding its late entry into Moneyval in a short period of time but also offer critical observations.
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 Church around the world adhered to international standards on money laundering and terrorism financing.
The Vatican also established an internal Financial Information Authority (FIA) along the lines of other countries and promised to liaise with other countries' equivalent agencies around the world.
The Moneyval report will use direct and pointed language in its recommendations on what must be improved.
Moneyval inspectors visited the Vatican in 2011 and 2012 and in one year they will issue a progress report on this Wednesday's evaluation suggestions.
VATICAN IN UNIQUE SITUATION
The Vatican is a 108-acre city-state surrounded by Rome and is the location of the Holy See, which is recognised by more than 170 countries as the centre of the 1.2 billion member Roman Catholic Church with the pope as its sovereign.
Because it has less territory than some family farms and has no real economy, it is in a unique diplomatic and financial situation compared to other small countries or enclaves.
But its single financial institution, the IOR, has put it at the centre of controversy and scandal for decades.
In 2010, Rome magistrates investigating money laundering froze 23 million euros ($33 million) the IOR held in an Italian bank.
The Vatican said at the time that its bank did 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.
The Vatican says Italian magistrates apply disproportionate attention to the Vatican, which has one financial institution, compared to say, the Republic of San Marino, which is also a sovereign country surrounded by Italy, but which has dozens of banks.
Last May, the board of the IOR unanimously passed a no confidence against Ettore Gotti Tedeschi, 67, the Italian president.
Gotti Tedeschi, a conservative Catholic who heads the Italian retail unit of Spain's Banco Santander, said he was "paying the price of transparency". But the Vatican and board members said he was an inefficient and divisive manager.
The IOR's most infamous entanglement with scandal involved the collapse 30 years ago of the Banco Ambrosiano, with its lurid allegations about money-laundering, freemasons, mafiosi and the mysterious death of Calvi, the Ambrosiano chairman.
The IOR held a stake in the Ambrosiano, then Italy's largest private bank, and investigators alleged that it was partly responsible for the Ambrosiano's 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, who was found hanging under Blackfriars Bridge near London's financial district, killed himself or was murdered.
The IOR offers financial services to religious orders of priests and nuns, dioceses around the world, Catholic charity groups and Vatican employees. (Reporting By Philip Pullella; editing by Ralph Boulton)