A top Catholic cleric with connections to the Vatican Bank was under arrest last night accused of laundering tens of millions of euro.
Monsignor Nunzio Scarano, 61, is suspected of plotting to help rich friends smuggle huge sums of cash into Italy from Switzerland.
The move comes two days after the Pope set up an inquiry to look into the activities of the troubled bank.
In a scandal that reads like a spy novel, it involves police wiretaps, a private plane rented to collect the cash and burned mobile phones.
An allegedly corrupt secret services agent who promised to get the money past Customs is also being quizzed by police.
The case against Msgr Scarano will come as an acute embarrassment to Pope Francis who has dispensed with many of the trappings of office stressing the importance of a simple life.
The Vatican announced he had set up a commission of inquiry into the Vatican bank which has been hit by a number of scandals in the past decades.
Msgr Scarano was arrested in Rome after allegedly hatching a plot to bring up to €40million into Italy for a family of shipbuilders in his hometown of Salerno in southern Italy.
It was not clear how or when the money got to Switzerland in the first place.
Asked if money laundering was involved, magistrate Nello Rossi said that would depend if the original source of the money was criminal activity. He added: “We are trying to determine the origin of the vast amount of money at the disposal of Scarano, who is the holder of several accounts.”
Mr Rossi said Scarano engaged Giovanni Zito, a policeman on loan to the secret services, last July to help him get the money from a Swiss bank into Italy without tax and customs controls.
The third person arrested was Giovanni Carenzio, a financial broker with offices in Switzerland and the Canary Islands.
Papal spokesman Fr Federico Lombardi said Vatican authorities are ready to co-operate with the Italian investigation.
He added FIA, the Vatican’s own financial intelligence authority, was following the case and would take action if necessary.