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Priest with Vatican ties linked to jailed financier

A priest with ties to the Vatican was released under electronic monitoring on Friday after being arrested on charges of fraud and conspiracy to launder money in connection with one of America's largest insurance frauds.

Monsignor Emilio Colagiovanni, 81, of Rome, is accused of working with financier Martin Frankel, the alleged mastermind of a scam that prosecutors say defrauded insurance companies of at least $A378 million.

Colagiovanni was arrested on Thursday while visiting his sister in Cleveland. He is president of the Monitor Ecclesiasticus Foundation, which publishes a journal of Roman Catholic canon law.

He is accused of helping Frankel and his St Francis of Assisi Foundation acquire or attempt to acquire insurance companies while concealing Frankel's involvement, according to a complaint filed by the US attorney in Connecticut.

Colagiovanni is accused of making false statements to insurance companies and regulators. He allegedly told them the source of the foundation's funds was the Holy See and other Catholic entities, according to the complaint.

If convicted on the two counts, Colagiovanni faces a maximum prison term of 25 years and fines of up to $A1.4 million. The FBI and the criminal division of the Internal Revenue Service are conducting the investigation.