* Probe launched after prelate arrested over smuggling
* Promises to "eradicate wrongdoing of clients"
By Philip Pullella
VATICAN CITY, July 4 (Reuters) - A preliminary inquiry by the Vatican bank after the arrest of a Vatican prelate on suspicion of trying to smuggle huge sums of money into Italy from Switzerland found "clear failings" at the institution, a source close to the bank said on Thursday.
The board of the bank, formally known as the Institute for Works of Religion (IOR), held a meeting on Thursday that also addressed the shock resignation of its two top managers on Monday. The meeting had not been made public.
At the meeting Ernst von Freyberg, the bank's German president, told the other four board members of the preliminary results of an internal investigation.
It discovered "clear failings that should serve as stark reminder of the urgency of improving the IOR's processes," Freyberg told the board, the senior source told Reuters.
The Vatican was rocked last Friday by the arrest of Monsignor Nunzio Scarano, who is accused of plotting with two other people to smuggle 20 million euros ($25.8 million) into Italy from Switzerland for rich friends in southern Italy.
Scarano, 61, who worked as a senior accountant in the Vatican's financial administration and had close and regular contacts with the Vatican bank, was arrested along with an Italian secret service agent and a financial intermediary.
Scarano is accused of money laundering in a separate investigation in the southern city of Salerno, his hometown.
According to the source, Freyberg told the board that the bank would continue to improve internal procedures and review every account. "We will systematically identify and eradicate wrongdoing by clients of our institute," Freyberg said.
Apart from Freyberg, the board is made up of another German, an Italian, an American and a Spaniard. All are non-clerics and are either businessmen or bankers.
Three days after the arrest of Scarano, IOR director Paolo Cipriani and deputy-director Massimo Tulli resigned. Both are under investigation by Rome magistrates, the third inquiry in Rome regarding suspected money laundering at the IOR.
Freyberg, who became president of the bank this year, has also assumed the role of bank director until a permanent replacement is appointed.
The bank has also established a new position of chief risk officer who will be charged with improving compliance with financial regulations at a bank which has long been a byword for secrecy and lack of transparency.
Last week, two days before the arrests, Pope Francis set up a commission of inquiry into the Vatican bank, which has been hit by a number of scandals in past decades..
The European anti-money laundering committee, Moneyval, said in a July report that the IOR still had to enact more reforms in order to meet international standards against money laundering. (Editing by Mark Heinrich)