The Financial Intelligence Authority's (AIF) also said in its annual report for 2014 that it had forwarded seven cases of suspected fraud or tax avoidance to the Vatican prosecutor's office for further investigation.

It said the number of reports it had received of potentially suspicious financial activity fell to 147 last year, down from a peak of 202 in 2013, which officials said showed that reforms and reporting procedures were working.

The Vatican bank, seeking to repair its image after a series of financial scandals, has been undergoing massive reforms over the past three years.

The bank, formally known as the Institute for Religious Works (IOR), has toughened regulatory standards and closed thousands of accounts.

Reforming the IOR has been one of the most sensitive issues tackled by Pope Francis as he has sought to overhaul the complex Vatican administration.

The report said it had carried out the first on-site inspection of the IOR to see if it was fully complying with new international transparency and accounting requirements as well as anti-money laundering legislation.

"Overall, the results of the first on-site (inspection) showed no fundamental shortcomings," the report said.

However, the regulator had assigned the bank "an action plan and specific corrective measures" that the AIF would monitor.

Rene Bruelhart, a Swiss lawyer who is president of the AIF, told a news conference that while there had been "a lot of progress" the need remains for a strengthening of due diligence procedures with regard to bank customers to further reduce the potential that the institution could be used for financial crimes.

"It was a positive year, during which we focused on implementation and consolidation (of reforms)," said Bruelhart, the former top anti-money laundering expert for Liechtenstein.

He said that the inspection of the IOR "was an important step that showed that the supervisory system in the Vatican is working.

Last week the IOR posted a sharp rise in full-year net profit after absorbing the costs of the clean-up to tighten financial governance and eliminate abuse.

The IOR's 2013 results had been hit by heavy writedowns on bad investments and a jump in operating costs to meet the new anti-money laundering standards.

The AIF report said there were three cases in 2014 of preventative freezing or suspension of accounts or operations. This was believed to include the freezing of funds of several former IOR executives suspected of embezzlement.