The real-estate scandal has shaken the Vatican’s financial credibility.

Photo: vatican media/Reuters

ROME—The Vatican announced its first arrest in connection with a financial scandal over the Holy See’s investments in London real estate.

Vatican prosecutors on Friday arrested an Italian businessman, Gianluigi Torzi, charging him with various counts of extortion, embezzlement, fraud and money laundering, carrying a potential sentence of up to 12 years, according to the Holy See Press Office.

Its statement said the arrest was “in relation to the well-known events connected with the sale and purchase of property on Sloane Avenue, London, involving a network of companies which included some officials of the Secretariat of State,” the Holy See’s executive arm.

In October, Vatican police raided the offices of its financial watchdog, the Financial Information Authority, or AIF, and the Secretariat of State as part of an investigation into the investment in the property in London’s posh Chelsea neighborhood.

The Vatican prosecutor’s investigation came in response to a complaint from the Vatican Bank. It had objected to a request from the Secretariat of State for a loan of more than €100 million ($113 million) to finance the purchase of the property. The Vatican Bank viewed the deal, which required clearance by AIF, as suspicious.

The Vatican subsequently suspended five employees—including AIF’s No. 2 official, Tommaso Di Ruzza—and its security chief resigned in connection with the investigation. What, if anything, the suspended employees were suspected of doing isn’t clear. In April, the Vatican announced that Mr. Di Ruzza had stepped down from his post at the conclusion of his five-year term.

The affair has shaken the Vatican’s financial credibility. In November, the Egmont Group, a Toronto-based network of more than 160 national financial-intelligence units around the world, suspended AIF’s access to its secure web system. The group said Vatican police had improperly seized information provided by financial regulators in other countries. Egmont restored the Vatican’s active membership in January.

Write to Francis X. Rocca at francis.rocca@wsj.com

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