ROME—A European anti-money-laundering watchdog Thursday lauded the Vatican for significant improvements in cleaning up its opaque financial dealings, boosting Pope Francis' efforts to overhaul the Holy See's finances after years of scandals.

But the 120-page report by Moneyval, a committee of financial experts backed by the 47-nation Council of Europe, criticized the Vatican for not tightening the regulatory oversight of its scandal-ridden bank.

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