By Joseph Fitchett

By any measure, France should have no trouble putting a stop to money laundering in Monaco, the minuscule playground for the rich tucked into the French Riviera. After all, France controls almost every aspect of government in the principality, including the appointment of Monaco's prime minister, who is always French.

But Monaco and its long-ruling Prince Rainier III are waging a "Mouse That Roared" defense against France's demands for greater transparency in the banking system and other financial operations, including the famed Monte Carlo casino. Even if France eventually prevails, its fierce, often hidden little war with Monaco illustrates how hard it can be to impose new global financial standards. If Monaco is fighting back, it is because the principality wants to protect its thriving financial activities - at last count, it boasted 45 banks with 200,000 accounts belonging to nonresidents - which generate more than a third of national revenues. People close to the 77-year-old prince say he thinks Paris has made tactical miscalculations that he can exploit to turn the tables on France and improve Monaco's fortunes.

Paris has powerful political reasons to make Monaco change its financial ways. In portraying itself as a leader in the crusade against abuses, the Socialist government in France hopes to blunt domestic complaints that globalization is making a few people very rich and creating hardships for most French people. For this, France has to clean up its own backyard. The French also aim to pressure Britain to move against Guernsey and other Channel Islands widely viewed as havens for hiding hot money, including money hidden from French tax authorities.

Behind the drumbeat of French complaints are underlying murmurs in Paris and other European capitals that the Russian Mafia might take over Monaco's banking system. Prince Rainier "may be losing control" to mobsters, said a French Finance Ministry official, who agreed to discuss the subject on the condition that he not be identified. But France also has a hidden agenda: It wants to curtail Monaco's role as a magnet for tax evaders. For generations, Europe's rich have stashed money in Monaco - and in similar tax havens such as Luxembourg, Switzerland and Liechtenstein - as a way of avoiding punitive taxation rates.

Until now, France has largely condoned Monaco's financial system. Monaco's French residents have been subjected to French income taxes since a showdown with Paris in 1962. But no other residents pay taxes on income or even on interest, and none of the quarter-million offshore accounts held by people outside Monaco are taxed. France's tolerance has suddenly changed, officials said, partly because Monaco wants to join the euro, the single currency of key countries in the European Union. Once in, Monaco would be in an even stronger position to help criminals funnel dirty money into the Western economy.

The EU has also started moving to end banking secrecy among its 15 member states involving taxable income in nonresident accounts. That change was sought by France, which feels penalized in international competition by its comparatively high tax rates, but banking secrecy will only diminish if tax havens such as Monaco fall into line. But France's attempt to lump tax evasion with money laundering is meeting resistance because the banking industry and law enforcement authorities in Europe see money laundering as a much more serious crime. Tax evasion, while illegal, is usually not a felony in Europe. As a result, Monaco has never felt obliged to order its banks to name depositors in connection with tax problems in other countries.

Monaco's champions insist that Prince Rainier can capitalize on this distinction, which has been muted in a French campaign that has turned a harsh spotlight on the principality. First came a French parliamentary report, issued by Arnaud Montebourg, 42, a hard-line Socialist. His report last summer assailed Monaco as a well-oiled machine for money laundering. The Socialist government, not wanting to be outflanked by radicals within its ranks, produced its own reports from the finance and justice ministries. The unusual public onslaught provoked cries of "foul" from Prince Rainier and a vague threat to seek greater independence.

Monaco's counterattack has now been outlined to the International Herald Tribune by a key Rainier strategist, Jean Pierre Francois, a 78-year-old international banker with connections to the Socialist Party in France who is a resident of both Paris and Monte Carlo. In an interview, he said that he had been "encouraged" by Prince Rainier to intervene with decision-makers in both countries and with the media to lay out Monaco's case. Mr. Francois rejected the main thrust of French accusations as "silly nonsense" that could not stand up to serious professional scrutiny. Mr. Francois has not been alone in voicing doubts about the parliamentary report: Conservative French parliamentarians in Mr. Montebourg's mission dissociated themselves from its conclusions as overdrawn and one-sided.

Denouncing the French campaign as hypocritical, Mr. Francois noted the reach of French civil servants in the principality's inner workings and said that Paris "knows about and can control anything it wants in Monaco's financial dealings." As for the Russian mafia, he said, "These people thrive all over the French Riviera, so they have no interest in trying to worm their way into a tightly policed place like Monaco." Even some officials in Paris agree privately that Russian mafia kingpins would probably be uncomfortable in Monaco because of its size and vulnerability to French intelligence.

Hinting at a possible deal with Paris, Mr. Francois seemed to offer a compromise in which Monaco would reform its law enforcement in exchange for being allowed to continue operating as a tax haven for some foreign depositors. "Nobody can defend practices that help organized crime finance more crime," Mr. Francois said, "but it is fruitless to seek effective cooperation between governments or among banks on tax evasion, which many European countries do not consider a major offense and which banks have historically been loath to police."

Mr. Francois acknowledged that Monaco had sometimes refused to cooperate fully with other governments, even in criminal cases. But he dismissed such incidents as "dysfunctions" and insisted that the system was being corrected to improve Monaco's responsiveness to international warrants involving felonies. If there were an impasse, he hinted, Prince Rainier could retaliate by challenging the treaties setting Monaco's allegiance to France. These accords "smack of colonial domination," Mr. Francois said, raising the specter of diplomatic embarrassment and perhaps even legal sanctions if France resorted to strong-arm tactics against Monaco, as Charles de Gaulle did in 1962 when he imposed a customs crackdown on the principality over the income tax demand.

On that occasion, Prince Rainier knuckled under, literally overnight, because France controls Monaco's land outlets. But an attempt to impose a similar blockade today could backfire against Paris, Mr. Francois implied, if the French actions infringed the sovereign status of Monaco, which has been a full member of the United Nations since 1993. "There are plenty of people who would like a chance to get a foothold in Monaco," Mr. Francois said, suggesting that companies and investors from other countries such as Italy and elsewhere would be eager to fill any French vacuum.

Despite this defiant tone, Monaco hopes to extract a deal, according to sources in the principality. They say Monaco hopes to continue as an international tax haven, even if it is forced whittle away at secrecy covering accounts of people from European Union nations. France also may succeed in applying its wealth tax to the accumulated fortunes of French residents in Monaco. In exchange for preserving a special taxation status, Monaco has started contemplating ways to meet French demands on criminal offenses, these sources said. Many complaints center on the small size of Monaco's law-enforcement staffs, and Prince Rainier might remedy that by hiring more local people and leaving fewer slots to be occupied by French civil servants. The rarity of prosecutions for money laundering in Monaco has convinced outsiders such as Mr. Montebourg that the principality is be a hotbed of crime. Indeed, Monaco's financial establishment has clearly been lax in upholding the key rule for bankers: "Know your clients." In practice, banks are supposed to know the identity of every depositor.

In the French parliamentary report, Monaco was compared unfavorably with another offshore financial haven, Britain's Isle of Man. With 200 billion French francs ($26.17 billion) in deposits, the island reported 1,200 suspicious transactions in 1998. Monaco, with 300 billion francs in accounts, had only 266 such reports in all since 1994, the parliamentary report said. Similarly, it said, a major French bank's branch in Monaco was found to have only empty folders for a quarter of its depositors, a reflection of Monaco's brisk business in accounts opened by trusts or by so-called fiduciary agents. In effect, these amount to shell companies designed to conceal the real owner of funds and reinforce banking secrecy.

Mr. Francois, while acknowledging that this system had been prone to abuse, insisted that critics had blown the situation out of proportion. Trusts, like foundations, are widely accepted in the United States and Britain. The crucial test, he said, is whether banks can and will break banking secrecy on deposits linked to serious crime. Possibly signaling a new attitude in Monaco, the principality this week agreed to freeze three bank accounts, containing $5.3 million, that a Swiss prosecutor has linked to a scandal involving France's sale of frigates to Taiwan in 1991. Early this month, Monaco for the first time started enforcing the "know your clients" doctrine. It put on trial four bankers accused of failing to report a suspicious bank deposit - $1 million, which turned out to be Colombian cocaine profits.

Even though the amount is comparatively small, the case is being watched in Paris. Significantly, the defendants are executives of the Banque du Gothard, a bank singled out for alleged laxity in the French parliamentary report. So, "It's a test," a French official said.