With its plume-helmeted soldiers and a ban on outsiders marrying elderly citizens for money, there is something of a comic opera quality about San Marino, the micro-state located on a hilltop near the Italian town of Rimini. Yet for Italian authorities, there is nothing comic about San Marino, whose website proudly talks up the principality’s banks as being beyond the reach of jealous Italian taxmen.

Last week, the Italian authorities struck back. Prosecutors in Bologna arrested the chairman, chief executive and other senior management of San Marino’s biggest bank, CRSM. Meanwhile, the Bank of Italy seized control of CRSM’s Bologna-based subsidiary Delta, which is one of Italy’s top dozen consumer finance companies.

While the Bank of Italy press release accompanying the seizure talks about flaws in San Marino’s money laundering controls, the ostensible reason for taking control of Delta was that CRSM had used hidden stakes to enjoy 100 percent ownership of Delta – which the Bank of Italy had expressly forbidden in the light of its money laundering concerns.

However, what the Bank of Italy release did not mention was how CRSM obtained financing for Delta’s €4.5 billion balance sheet, which grew sixfold between 2003 and 2007. An ongoing dispute in London’s High Court has shed light on how credit derivatives were used to achieve this, out of sight of the Italian and San Marino regulators, with about €700 million of the financing provided by Barclays Capital.