Pope Benedict XVI has signed an apostolic letter on 30 December 2010 that established the Financial Information Authority, according to the Catholic News Service homepage.
The newly-established independent agency will monitor all monetary and commercial transactions of the Vatican and make sure that they meet international regulations against financing terrorism and money-laundering activities.
The pope also promulgated the details of a new law that defines the financial crimes and penalties like imprisonment for any violation.
The violations may include corrupt practices, manipulation of the market, fraud and any support to terrorism.
The new financial law signed by the pope takes effect on 1 April, and reflects the latest European Union regulations.
Last year, the Institute for Works of Religion (Vatican Bank) was investigated by the the government of Italy over money laundering transactions valued at US$218 million (€180 million), according to a report from the Italian magazine Panorama.
The bank handles the money activities of the head office of the Catholic religion and other related associations using the "offshore" status of the Holy See.
In the 1980s, the Institute was involved in a major financial and political scandal during the 1982 US$3.5 billion bankruptcy of the Banco Ambrosiano where it was a major shareholder.
Archbishop Paul Marcinkus--head of the Institute between 1971 and 1989--was under consideration for indictment as an accessory to the collapse.
The high-ranking priest, however, was not brought to court because he had diplomatic immunity from prosecution.
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