The Vatican on Wednesday promised to redouble efforts against money laundering as it fights off a dark history after a Council of Europe report hailed recent progress but urged tighter controls.
"The report released today is not an end, but a milestone in our continuing efforts," the Holy See's Under Secretary of State Ettore Balestrero, who headed the Vatican's delegation to the Council of Europe, told reporters.
"We obviously wish to strengthen the overall system," he said.
Balestrero said the report's recommendations would be addressed "expeditiously and giving proof of effectiveness" and the Vatican will have to put together a progress report on compliance by July next year.
The Vatican in the study released by Moneyval, the Council of Europe's anti-money laundering body in Strasbourg, scored unsatisfactory ratings in seven out of 16 "key recommendations" and satisfactory ratings in nine.
The report noted that the foundations for a more transparent financial system in the tiny Vatican state "are now formally in place," adding: "The Holy See has come a long way in a very short period of time."
"But further important issues still need addressing in order to demonstrate that a fully effective regime has been instituted in practice," it added.
In particular, the report "strongly recommended" that the Vatican's bank, the Institute for Religious Works (IOR), "is independently supervised."
The bank is currently supervised by a committee of cardinals.
It also said that the IOR, which has 33,404 accounts, was still only in the early stages of a review of its client database promised by the end of 2012.
It added that the Vatican's gendarmerie had new powers for investigating financial crimes but did not appear to have enough training for the task.
The report also questioned whether the newly-established Vatican Financial Intelligence Authority (FIA) had "adequate powers" for its supervisory duties.
It said "a major concern" was that there had been no scrutiny by the FIA under the new rules on transactions and the origin of funds in IOR accounts.
The report comes after a series of scandals at the Vatican including on the issue of financial transparency and investigations in Italy into IOR accounts belonging to clergy allegedly being used by the mafia for money laundering.
The former head of the Vatican bank, Ettore Gotti Tedeschi, was sacked from his post this year -- according to some reports because of his commitment against money laundering and for his cooperation with Italian prosecutors.
The Vatican bank has a troubled history including in the 1970s and 1980s with the collapse of Banco Ambrosiano, where the Holy See was the main shareholder, which was accused of laundering money for the Sicilian mafia.
The chairman of Banco Ambrosiano, Roberto Calvi -- dubbed "God's Banker" in the press -- was found hanging from Blackfriars Bridge in London in 1982 in a suspected murder by mobsters for which no-one has ever been convicted.
In one of the latest inquiries, the La Repubblica daily on Wednesday reported on an investigation into a IOR account owned by a priest who was allegedly paid off by the mob, that was being used for money laundering and fraud.
One payment into the IOR account in 2010 was for 151,000 euros ($185,000).
Council of Europe inspectors had visited the Vatican in November 2011 to check on the Holy See's plans to tighten regulations against money laundering.
Pope Benedict XVI last December created a new financial authority after Italian prosecutors launched an investigation of Vatican bank officials.
The new authority is aimed at aligning the Holy See with new global standards, particularly after the Vatican failed to be included on a "white list" by the Organisation of Economic Cooperation and Development (OECD).
"It is important that the Holy See use its moral authority to raise maximum awareness about the far too frequent transnational crime of money laundering and the financing of terrorism," Balestrero said on Wednesday.
The Council of Europe report will serve as the basis for a decision by the OECD on whether to promote the Vatican to the white list but Balestrero said the Vatican would focus on responding to Moneyval's recommendations.
"This is a work in progress. We are moving step by step," he said.