Pope Francis suggested that parts of the deal made were corrupt, saying they have done things that do not seem clean .
Gianluigi Torzi is accused of extortion, embezzlement, aggravated fraud and money laundering in relation to the $200 million deal, said the BBC report.
He is being held in Vatican police barracks, and faces up to 12 years in prison if found guilty.
The 2018 purchase of the building is subject to an ongoing investigation.
The apartment block on Sloane Avenue, in London's exclusive Chelsea, had been bought with church money by the Secretariat of State, the body charged with the Vatican's diplomatic and political functions.
But it is alleged the price was greatly inflated.
In October 2019, police raided the Secretariat's office and seized documents and computers, and the Vatican suspended five officials, barring them from the city state, the BBC report added.
Pope Francis suggested that parts of the deal made were corrupt, saying "they have done things that do not seem clean".
Earlier this week, the Pope issued a new law designed to boost transparency in Vatican's financial deals.