Although tiny, the principality of Monaco seems to have what it takes when it comes to attracting the rich and famous. Home of sports and films stars, casinos, luxury yachts and casinos, it's harder to imagine a nicer place to relocate for tax reasons. Yet Monaco has been under fire of late, particularly from its neighbour and one-time protector France, for being lax in its counter-money laundering procedures. In October, the French Finance Ministry went a step further and issued an ultimatum to Monaco: either it has to tighten up its efforts to prevent "dirty" money passing through its banks and financial institutions, or France will take legislative measures against Monaco and tear up all its economic, political and administrative agreements with the principality.

Not surprisingly, Monaco's royal family have not taken too kindly to the French threats. Both Prince Rainier and his son, Prince Albert, have spoken out in the past and repeatedly refuted claims that their country is a haven for criminals to stash their ill-gotten gains. Prince Rainier's interview last month with French newspaper Le Figaro, in which he dismissed French allegations as false and a deliberate and unacceptable "effort to damage the image of Monaco", was remarkable in that the normally reserved 77-year old unleashed a vehement attack on the French, even calling for a new treaty with France that would break all ties between the two countries and give Monaco back its full independence.

Prince Albert recently reiterated that Monaco is a "serious" place with hard-working people and a diverse economy. He attributes some of the harsh words from France to politics, and like his father, some to jealousy over Monaco's thriving economy. Prince Albert said: 'We are very disappointed....not only because of what we were accused of but the way it was done and the way the charges were thrown out in the open without any discussion with us first.'

But Prince Albert, Prince Rainier and the whole Grimaldi dynasty really seem to be up against it this time. On the surface, there is nothing about Monaco that does not seem carefully controlled. Joseph Sauzier, the permanent delegate to the Monégasque Banking Association, said recently that much has been done in Monaco over the past few years to tighten oversight: 'This is not a banana republic,' he said. 'We are not perfect of course, we but have laws and regulations and the whole lot.' Yet according to Interpol, which attempts to track suspect money as well as individuals, everybody from the Sicilian Mafia to Colombia's Medellín cocaine cartel has some kind of an account in the principality.

If France has its way, it will pass new laws to administer what Elisabeth Guigou, a former Justice Minister, calls "a dose of reality." What is clear is that the stand-off between Monaco and France will not be resolved easily. Just as there are those in Monaco who would like to see the back of the French, there are equally, if not more, in France - predominantly the Socialists - who yearn to snuff out the prosperity and lifestyle enjoyed by Monagasques and their tax exile guests.

Despite the outrage felt by the Grimaldis, it has been suggested that Monaco might try to broker a deal with France. After all, it has a large number of financial institutions to protect and may be forced to back down to some degree and change its banking secrecy laws. France 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 is said to have started contemplating ways to meet French demands on criminal offences.

Possibly signaling a new attitude in Monaco, the principality last week agreed to freeze three bank accounts, containing US$5.3m that a Swiss prosecutor has linked to a scandal involving France's sale of frigates to Taiwan in 1991. Moreover, Monaco has for the first time started enforcing the "know your clients" rule and has put on trial four bankers accused of failing to report a suspicious bank deposit - US$1m, which turned out to be Colombian cocaine profits. It's certain that the case is being watched closely in Paris.

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