Monsignor Nunzio Scarano, dubbed "Don 500" by the Italian media because of his purported favorite euro banknote, was questioned for three hours today by Judge Barbara Callari, who must decide whether to confirm his arrest.
Attorney Silverio Sica told The Associated Press that Scarano is not adjusting well to his time in prison and has asked for house arrest to await a decision on his fate, expected in a day or two.
It was the latest financial scandal to hit the Vatican and its embattled bank, which has long been regarded as an offshore tax haven prone to scandal.
Sica said Scarano "recognised it wasn't licit," but acted to help out his friends.
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Prosecutors have identified the friends as Italy's d'Amico shipping family and said they presumably had the money in Switzerland to avoid paying Italian taxes. The prosecutors have refused to say whether any members of the d'Amico family are under investigation and a family spokesman didn't immediately respond to an email requesting clarification about the family's legal status.
Two other people were arrested along with Scarano: Italian financier Giovanni Carenzio and Giovanni Zito, who until recently was a member of the Italian military police's security and information agency.
According to wiretapped conversations, the three allegedly plotted to smuggle the cash that Carenzio held in a Swiss bank account without declaring it to authorities at the airport. Zito was to be the mule, since his high rank would have enabled him to pass through customs undetected.