By James Mackenzie
ROME (Reuters) - The Vatican said on Friday it had frozen funds belonging to a senior cleric at the center of a suspected money smuggling operation, and could open investigations into other individuals.
Monsignor Nunzio Scarano, who has close links to the Vatican bank, was arrested last month, accused of plotting to bring millions of euros in cash into Italy from Switzerland for rich friends.
Scarano's lawyer said his client, who is currently being held in Rome's Queen of Heaven jail, was prepared to cooperate fully with investigators. "Scarano is in a position to clear up everything," he said.
Although the Vatican bank has not been directly implicated itself in the case, it has been under heavy pressure following a long series of scandals and growing criticism for its persistent failure to meet international transparency standards.
Two top directors have resigned in the wake of the case and Pope Francis has appointed a special committee of inquiry to get to grips with the problems at the bank, known formally as the Institute for Works of Religion (IOR).
Scarano, a former senior accountant in APSA, the Holy See's financial administration, has been accused of trying to smuggle 20 million euros ($26 million) past customs on behalf of a family of rich ship owners from his home town of Salerno.
He was arrested last month with Giovanni Zito, an Italian secret service agent, and financial broker Giovanni Carenzio.
A Vatican statement said the chief judicial official of the tiny city state had ordered his accounts in the Vatican Bank to be frozen while checks are carried out. It said the investigation could be extended to other individuals.
IOR appointed U.S. financial consultancy Promontory Financial Group to conduct a review of all accounts potentially affected, and was cooperating with the investigation, the statement added.
HELPING WITH INQUIRIES
Scarano's lawyer Francesco Caroleo Grimaldi said his client would be able to help the investigation by providing information on the wider activities of the bank.
"We hope he will be given the chance not only to explain the situation regarding his account but also to show a series of activities at IOR and APSA, which would certainly merit the attention of the Holy See," he said.
IOR has been under pressure to bring its notoriously opaque operations into line with international transparency standards aimed at combating money laundering and other illegal financial operations.
Pope Francis, who has sought to emphasize the Church's mission of serving the poor, has undertaken a number of steps to clean up IOR and is watching closely as the committee of inquiry begins its work.
The Vatican said it expected that a series of measures to strengthen procedures and improve compliance and reporting would be completed by the end of the year.
Two of IOR's top managers resigned earlier this month in the wake of Scarano's arrest and prosecutors are considering seeking to have the two, former director Paolo Cipriani and former deputy director Massimo Tulli, sent to trial.
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(Additional reporting by Mario Sarzanini; Editing by Michael Roddy)