INTERVIEW-Banks could be obliged to set Libor rates
* Alternatives to Libor to be found for some contracts
* Magistrates' says prelate used web of contacts illegally
* Scarano lawyer says document has no proof, only suspicions
* Scarano is target of two Italian investigations
* IOR in spotlight over global rules against tax evasion
* Pope has made cleaning up the Vatican a goal of his papacy
By Philip Pullella and Massimiliano Di Giorgio
ROME, July 21 A senior Catholic prelate arrested last month used his influence at the Vatican to provide private, illegal financial services for rich friends, Italian investigators say in a judicial document.
They say Monsignor Nunzio Scarano, who is the target of two Italian investigations and had accounts at the Vatican bank, engaged in "totally private, illegal activity which was also aimed at serving outsiders".
Scarano was arrested in Rome on June 28 along with a self-styled financier and a member of Italy's secret services and formally accused of taking part in a plot to smuggle 20 million euros ($26.28 million) into Italy from Switzerland. .
Reuters has obtained the 28-page document in which magistrates in Rome had asked a judge to order his arrest.
Scarano's lawyer, Silverio Sica, denied the accusations it contains. "They don't have any evidence to prove all of this," he said on Sunday. "These are just suspicions".
Pope Francis, who has made cleaning up the Vatican a goal of his papacy, has set up a commission of inquiry to reform its bank. On Friday he announced he was forming another commission of lay experts to help him overhaul the Holy See's economic and administrative departments.
Account holders at the Vatican bank, officially known as the Institute for Works of Religion (IOR) and which has been plagued by scandal for decades, are obliged not to let them be used, even indirectly, by third parties.
The IOR has long been in the spotlight for failing to meet international standards intended to combat tax evasion and the disguising of illegal sources of income.
Its stated purpose is to provide financial services for religious orders of priests and nuns, Holy See officials and Vatican employees.
Scarano, a former banker who became a priest at the relatively late age of 35, worked as a senior accountant in the Vatican's central financial administration office, the Administration of the Patrimony of the Holy See, or APSA.
In the document, the magistrates say Scarano, who worked at APSA for 22 years, offered his friends "a series of services ... in the area of financial transactions, in particular when there was a need or a request for them to remain secret".
They say the prelate carried out "a series of illegal activities by unscrupulously using his network of contacts in different areas, including businessmen, clergy who looked the other way, secret service agents and Vatican bank (IOR)personnel".
The IOR's director and deputy director, who are under investigation by Italian magistrates, resigned on July 1, three days after Scarano's arrest. On July 12, the Vatican froze Scarano's accounts in the IOR and said its own investigation could extend to other persons.
In an interrogation after his arrest, a transcript of which was obtained from legal sources and whose contents were confirmed by Sica, Scarano says he was to have received 1.5 million euros as a loan to pay off a business debt connected to one of the real estate companies he had a stake in.
Scarano has had two requests to move from jail into house arrest turned down. He is also under a separate money laundering investigation by magistrates in his hometown of Salerno, where he is accused of withdrawing 560,000 euros in cash from his account at IOR and giving small amounts to friends in exchange for 61 cheques drawn on Italian banks, according to court documents.
He later cashed the cheques, which ranged from 2,000 euros to 20,000 euros, in what magistrates say was an attempt to mask the origin of the money. His lawyers say that money came from donations to build a home for the elderly.
Magistrates say Scarano used that money to pay off a mortgage on his luxury apartment, filled with expensive works of art. Scarano's lawyers say he intended to sell the apartment at a profit in order to help build a home for the terminally ill.
In the document, magistrates say Scarano received 20,000 euros each month from Cesare D'Amico, a member of a wealthy shipping family in Salerno. The payments, which came from foreign bank accounts, were marked "for works of charity" but the magistrates say Scarano used them "for totally personal ends".
It says that in a tapped telephone conversation Scarano says that he and D'Amico had a joint account at the IOR. But in the interrogation after his arrest, Scarano said he had lied during that telephone conversation and that there was no joint account.
D'Amico's lawyer, Vincenzo Crupi, also denied that his client had a joint account with Scarano at the IOR.
Crupi told Reuters the D'Amico family was "very religious" and had made many donations to Scarano over the years, particularly to a fund to help the elderly in Salerno. He denied that the 20 million euros that Scarano is accused of plotting to smuggle into Italy belonged to the D'Amico family. ($1 = 0.7611 euros) (editing by David Stamp)
* Alternatives to Libor to be found for some contracts
Aug 9 The following financial services industry appointments were announced on Thursday. To inform us of other job changes, email to email@example.com
* Investors fear record fines, risk of countersuing regulator