Argentinian-born Patrizio Benvenuti, 64, former military chaplain in Italy who retired to the Canary Islands, had won the confidence of investors due to his work in the Vatican's legal tribunal.
He has been placed under house arrest.
A European arrest warrant has also been issued for one of his close collaborators, 54-year-old French Christian Ventisette, a businessman involved in finance and property.
The inquiry has identified nine suspected accomplices and nearly 300 victims, most of them elderly people living abroad.
They sent money "in the hope of entrusting their savings to finance and property sector experts as well as with the will to contribute to and help the humanitarian foundation Kepha," run by Benvenuti, the financial police said in a press release.
Roughly €30 million of the money was allegedly laundered through individuals and companies in Italy and overseas.
The suspected fraud was exposed by a nun who used to work with Benvenuti.
Italian police have since seized an eight-million euro villa in Piombino, facing Elba island on Italy's Tuscan coast, as well as an archaeological site in Sicily among other property.
The European warrant also calls for the seizure of a magnificent villa on the French island of Corsica.
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