The financial police in the southern city of Salerno said Monsignor Nunzio Scarano's Vatican bank accounts had been used to transfer millions of euros in fictitious donations from offshore companies.
Mgr Scarano's lawyer said his client was merely taking money from donors who thought they were funding a home for the terminally ill.
The monsignor, who was arrested in July and is now under house arrest because of his failing health, is on trial in Rome on the smuggling charges.
His lawyer Silverio Sica said: "We continue to strongly maintain the good faith of Don Nunzio Scarano and his absolute certainty the money came from legitimate donations.
He was first arrested in Rome on allegations he had plotted to secretly transport €20m in a private jet from Switzerland to avoid paying customs duties.