UPDATE 2-Vatican bank asks Italy to normalise ties after reforms
* Report comes a day after prelate charged with money laundering
* Accounts are being closed and scrutinised (Adds more from report, details of relations with Italy)
VATICAN CITY, Jan 22 (Reuters) - The Vatican bank asked Italy on Wednesday to resume financial relations effectively frozen since 2010, saying it had made great progress with new anti-money laundering measures Rome had demanded.
The request was made in a status report on the "compliance and transparency program", of the bank, whose official title is the Institute for Works of Religion (IOR).
"The IOR looks forward to a resumption of full interaction with Italian financial institutions pending review by Italian regulatory authorities of the Holy See and Vatican City State's anti-money laundering provisions," the report said.
Italian banks stopped dealing with the Vatican bank in 2010 after the Bank of Italy told them they had to enforce strict anti-money laundering criteria.
That year, Rome magistrates investigating possible money laundering froze 23 million euros ($31.15 million) held by the IOR in two Italian banks. The IOR said it had merely been transferring its own funds between accounts in other countries.
The money was released but the investigation continues.
The Bank of Italy blocked the Italian branch of a German bank last year from handling credit card payments at the Vatican museums and other lucrative tourist destinations.
Service was restored after several months when the Vatican struck a deal with Swiss card payment specialist Aduno.
The report was prepared for the IOR's board, which is made up of five internationally known businessmen and bankers from Germany, Italy, the United States and Spain.
IOR president Ernst Von Freyberg, who was hired last year and has been spearheading the bank's reforms, "ordered several special investigations with regard to specific account and transaction activity," the report said, without giving details.
The IOR was thrust back into the spotlight on Tuesday when Monsignor Nunzio Scarano, a former Vatican prelate on trial for an alleged plot to smuggle 20 million euros into Italy was further charged with laundering millions through the bank.
NOT A SAINT
In the case of Scarano, who as a senior accountant in another Vatican department had ready access to the bank, it commissioned a separate internal investigation into his bank activities after his first arrest last June on money smuggling charges.
Pope Francis has vowed to make Church finances meet global standards of transparency. He has not ruled out closing the bank if it cannot be reformed and last July said it was clear that Scarano "is no saint". Italian investigators thanked the Vatican for "fully collaborating" on the Scarano case.
The bank will soon undergo an on-site inspection by the Vatican's financial authority, the report said, an action called for last month in an otherwise very positive assessment by Moneyval, a monitoring committee of the Council of Europe.
The report said the IOR, which has hired the international financial group Promontory to help put reforms in place, had so far checked about 55 percent of its some 18,900 client records.
Those allowed to have accounts are Catholic institutions, clerics, employees or former employees of Vatican City with salary and pension accounts, and embassies and diplomats accredited to the Holy See.
The bank has been closing accounts held by persons or institutions outside those categories and suspending or closing accounts suspected of having been used for money laundering. This was the case in the Scarano affair, since he was authorised to have accounts but allegedly used them to launder money.
The summary did not say how many suspicious accounts were suspended in 2013.
About 150 reports of possible suspicious transactions were filed with the Vatican regulator in 2013, compared to only six in 2012. The Vatican said this was a normal result of improved monitoring because there were few or no procedures in place to report suspicious movements before. ($1 = 0.7383 euros) (Reporting by Philip Pullella; Editing by Catherine Evans)