Vatican Bank Scandals - Pope Francis makes progress
Ettore Gotti Tedeschi
But in January 2017 a Rome prosecutor asked for sentences of one year in jail for former Vatican bank Director-
General Paolo Cipriani and 10 months for his former deputy Massimo Tulli.
The trial concerns suspected breaches of Italy’s anti-money-laundering norms linked to two suspicious operations that led to the seizure of 23 million euros in 2010, later returned to the bank of the Holy See. The IOR operated in Italy without authorization for 40 years, Rome prosecutors said in court. From January 1 to February 12, 2013, the Bank of Italy froze all credit card and ATM transactions inside the Vatican City over its failure to fully implement international anti-money laundering standards. Pope Benedict took swift action to comply.
From the prosecutors’ statements it looks as if Tedeschi was forced out by former Secretary of State Bertone in order to stop him hindering IOR transactions on behalf of an Italian businessman, Angelo Proietti, which are central to the case. The defence begins its submission on February 23.
What has Pope Francis done to bring reform? Why is it taking so long? And how much truth has there turned out to be in the stories of scandals?
Like many around the world I welcomed the election of Pope Francis as a new kind of leader for the Catholic church (collinsm.com/blog). He brought a tougher approach: streetwise financial and political skills honed in a deprived urban environment far from the Vatican where his predecessor, Pope Benedict, noted for his academic gifts, had spent most of his life. Now it seemed there was a Pope who could bring to completion the reform of Vatican institutions, in particular the so-called Vatican bank, that Pope Benedict had felt forced to leave part-done.
As archbishop of Buenos Aires, Jorge Bergoglio had swiftly sorted out financial scandals and maladministration, when church officials had given church endorsements to banks in exchange for paying off their credit cards. Three years into Pope Francis’ papacy he set out the principles of his reforms in a speech to the Curia, the Church’s governing body, on December 22, 2016. Now is time to take stock of what the Pope has achieved.
First of all the constraints under which the Pope has to work when dealing with the Vatican bank should be recognised. Then a more just assessment can be made of what he has achieved so far. As a Christian leader the Pope does not have open to him the slash-and-burn tactics of the corporate hatchet man. His first responsibility is as Bishop of Rome and as bishop he has care not just of the careers but also the souls in his charge. In practice also the Pope, even though he is an absolute ruler and can and does make decisions on his own, has to work with at least the tacit consent of a majority of the College of cardinals and with the cooperation of the officials of the Curia, the Church’s government.
In fact the Vatican bank is hardly a bank at all in the generally accepted sense. Its actual name is the Institute for the Works of Religion (IOR). It is a privately held financial institution founded to safeguard and administer property given to the Church for works of religion or charity. The bank accepts deposits only from top Church officials and Catholic entities. Since its inception in 1942 IOR has engaged in many transactions of doubtful propriety or morality.
A book published in 2012 by Italian journalist Gianluigi Nuzzi details intrigue, corruption, power struggles, bribes, and money laundering. Then a cache of 4,000 documents leaked from Pope Benedict’s safe in 2013 and detailed in Gerald Posner’s exhaustive account God’s Bankers (2015) made public further evidence to the dismay and disgust of the world.
The leaders of the IOR had every reason to keep their doings secret and resist efforts to make their transactions transparent. They simply had to be forced by other banks, principally Deutsche Bank, JPMorgan and UniCredit, the EU anti-money laundry laundering agency MONEYVAL, the Financial Action Task Force of the G-7 (the FATF), the Italian authorities and the pressure of public opinion inside and outside the Church to bring their procedures into line with modern practice and to cooperate with other institutions in tracking suspicious flows of funds.
It was the bankers’ fear of being tarnished by their business dealings with the Vatican bank after the 2008 credit crisis (for example, giving the IOR access to international markets) and fears of fines from regulators that led them to take steps that forced the IOR to undertake reform. That the leaders of the IOR should and could have introduced changes in culture and reforms in procedures is beyond doubt. Had they wished, they could easily have got help from Italian banks and financial consultants, who these days are well reputed for their probity and efficiency.
How culpable each individual was is a matter for judgment by those in the best position to know such as the Vatican regulators and prosecutors and the courts. Suffice it to say that the modernization of the IOR is a challenge for organizational development. The Pope’s task is not helped by censorious tut-tutting however understandable or by vindictive calls for vengeance by those who may care little for the propriety of the Vatican’s finances, far less the well-being of the Universal Church.
From my own experience I can say that bringing about deep-seated and lasting change is one of the toughest challenges for leadership. Too mild a request will not motivate to action, while too stiff a challenge will evoke resistance. Neither will result in voluntary self-development, far less in creating a learning organization. Thus this review of Vatican financial reform to date will take into account the human as well as the legal and professional realities of institutional money management.
Pope Francis and his financial advisers
Pope Francis told his financial advisers at their first meeting in July 2013 that sound financial management was a pillar of the Church’s mission. It soon became clear that that meant adequate transparency, maximum operational efficiency, and proper safeguards for monies given to the Church for the benefit of the poor. In public the Pope spoke out against ‘’the idolatry of money’’, “all-encompassing corruption” and “tax evasion that had reached global dimensions”.
Honesty, efficiency and transparency are the Pope’s priorities. Within weeks of taking office, in June 2013, he addressed the problem of the Vatican bank in three ways. First, he abolished the €25,000 annual stipend paid to the bank’s five supervisory cardinals. Second, he brought in top-level management consultants to scrutinize every aspect of Vatican bank operations. Third, he set up a commission of external secular financial and legal experts to recommend reforms. The commission was told to consider even whether the Vatican bank should simply be shut down. Later, the regulator, the Financial Information Authority (AIF) was given broader powers of supervision.
Elizabeth McCaul, Partner-in-Charge, Promontory Financial Group
In particular a team of 25 regulatory specialists from the US management and regulatory compliance experts Promontory Financial Group was flown in. They were led by Elizabeth McCaul, a Catholic, and the partner-in-charge of the firm’s New York office, who had been a superintendent of banks for the state of New York. The team were given six months to trawl through all of the Vatican bank’s 19,000 account-holders. They began by cross-checking the computer scans of the passport of every account holder against the names and faces in the IOR records. Then the information for every transaction on every account was checked using an algorithm to see whether it fitted the usual customer profile. Altogether 16,900 accounts were checked in six months and 3,300 were shut down.
The American banking experts found inadequate documentation, poor cashflow checks and ignorance about due-diligence procedures. They also discovered that many accounts were being held through a web of proxies that made it difficult to determine who really controlled them. The Promontory team set out new standard rules and established an IT system to automate them. The result was to make IOR operations compliant with Vatican law and to align Vatican law to international standards, and to make senior management properly accountable to the regulator. The vast majority of the accounts shut down were dormant accounts with a negligible balance, or were held by individuals no longer eligible to hold an account under the new rules.
But before we conclude that everything at the current IOR is done and dusted we should note that its longstanding gross inefficiency had effectively robbed some of the world’s most vulnerable through unnecessary running costs and incompetence. Moreover some IOR accounts had been frozen during regulatory or criminal proceedings. Indeed the Promontory team found 200 serious irregularities, each of which triggered a “suspicious transaction” report that was sent to the bank’s regulator.
Cardinal Bertone, Secretary of State under Pope Benedict
One such case was an investment in the Lux Vide production company the bank had made — against the advice of its staff and supervisory board — on the insistence of Cardinal Bertone, Secretary of State under Pope Benedict. A case on the transaction has been opened by the regulator, but there has been no further news since June 2014, when the entire supervisory board of the AIF was replaced by the Pope. Few in Rome expect the Bertone case to advance to the Vatican prosecutor. But the fact that a pope’s former second-in-command is under the scrutiny of the regulator is a measure of how far Francis’s revolution has advanced.
Meanwhile we may suspect wrongdoing in other cases. But what we suspect is not evidence a prosecutor can present and a court assess. The likelihood is that little more will be heard about transactions before Pope Francis took office and enacted reforms, but any subsequent malfeasance is much more li
kely to come to light, as evidenced by the steady significant increase in the number of ‘’suspect transactions’’ registered by the AIF.
Cardinal Pell, Prefect of the Secretariat for the Economy
The Cardinal-Archbishop of Sidney, George Pell, had for years been a vocal critic of the Vatican bureaucracy. He had reformed the finances of the archdioceses of Sydney and Melbourne during his time in charge. Thus when the financial commission (and another commission on other Vatican financial institutions) delivered its report a year into the papacy, it was Pell whom Francis asked to lead a complete overhaul of Vatican finances. Pell recommended that the Vatican bank should not close, but should lose its function of managing investments. Pell was also one of nine prelates Francis chose to be in his new cabinet of cardinal advisers, the Cardinals’ Commission, the C9.
Cardinal Reinhard Marx, Archbishop of Munich
Although Pell has been given unprecedented control over all Vatican finances, he is overseen by a supervisory council chaired by another of the C9, Cardinal Reinhard Marx, the Archbishop of Munich. To add to the system of checks and balances that Francis has introduced, there is a new position of auditor general, a layman with powers to go anywhere in the Vatican to conduct spot checks as well as annual audits.
Having to learn new skills, follow new European procedures, produce annual reports and, most of all, accept accountability for the first time, including accountability to laypeople and international authorities, has shocked and shaken the senior management of IOR and provoked continual resistance.
When the pope placed an old friend, Monsignor Battista Ricca, inside the bank to be his eyes and ears there with access to all documents, opponents within the Curia leaked a story about him to the Italian press, claiming Ricca had had homosexual affairs while serving as a papal diplomat in Uruguay a decade before. Although it was widely assumed that Ricca would have to resign despite Vatican denials of the allegations, streetsmart Pope Francis was not to be outmanoeuvred. He refused to accept Ricca’s resignation and when asked about Ricca’s gay past, replied ‘’who am I to judge?”
Similar dirty tricks were played against Cardinal Pell. Stories were put about that he was submitting extravagant expense claims. At a consistory of cardinals, attempts were made to curb his powers. Pope Francis would not allow it. He was clear that no compromise could be permitted in the pace of change. His watchword was fretta, Italian for faster, stronger, more. The pope has backed the reform effort at every turn. His track record shows that his focus is fixed firmly on the poor while he deploys a canny understanding of the politics of how change is achieved.
In January 2014, the Vatican Bank resumed normal relations with Italy after implementing moves to prevent money laundering and other financial crimes. A measure of the progress of Pope Francis’ reforms is the reports made by the Council of Europe’s MONEYVAL agency, a monitoring group of financial experts. In 2012 the Vatican bank was deemed to be compliant or largely compliant on only nine out of 16 core standards. In December 2015 MONEYVAL praised the Vatican’s progress in trying to get onto the white list of countries with strong credentials on combatting financial crime.
The IOR issued its first annual report in early October 2014, which showed that the bank had 19,000 clients from around the world, 33,000 accounts and €5bn in assets. Its 2015 Annual Report, published in May 2016, showed that the IOR had 14,801 customers made up of the Holy See and related entities, religious orders, other Catholic institutions, clergy, employees of the Holy See, and the accredited diplomatic corps. Today, approximately 75 % of the number of IOR customers are based in Italy and the Vatican, 15 % in Europe ex Italy and the Vatican and 10 % globally ex Europe.
The IOR’s key activities are to provide payment services as well as wealth management (interest bearing accounts and asset management products) for its customers. Few loans are made; the bank holds deposits, transfers money and makes investments. Half the bank’s clients come from religious orders; another 15 per cent are Holy See institutions, 13 per cent are cardinals, bishops and clergy, 9 per cent are from Catholic dioceses around the world. The rest of the clients are split among those who have, or should have, some “affiliation to the Catholic Church”. Donations and cash, from Sunday collections and charitable giving, are held. As much as 25 per cent of the bank’s business is done in cash, which raises concerns about the risk of money laundering, concerns which are being addressed. About a third of its business comes from donations rooted in charities. Applying the system Promontory put in place, a new law (Law XVIII), and new regulations from the AIF, Anti-Money Laundering (AML) and Know Your Customer (KYC), by December 2015 4935 accounts had been closed. The remediation process is complete; a few historical tax cases remain.
Management has worked to rebuild trust and bring stability to the IOR client base. For 2015, IOR will pay a dividend to the Holy See of Euro 16.1 million, representing its net profit. Its equity remains untouched as per its Statutes. As of 31 December 2015, IOR’s equity net of distribution is Euro 654 million. The total value of assets entrusted by customers to the IOR decreased marginally to Eur 5.8 bn in 2015 (Eur 6 bn in 2014). These assets consisted of Eur 1.9 bn (Eur 2.1bn in 2014) in customer deposits, Eur 3.2 bn (unchanged from 2014) held in managed portfolios and Eur 0.7 bn (unchanged from 2014) held for customers under custody agreements. The Financial Statements 2015 has been audited by Deloitte & Touche S.p.A. Further information can be found on www.ior.va.
Jean-Baptiste Douville de Franssu, President of the IOR, and the Director General, Gian Franco Mammì, participated in a roundtable question and answer event with Vatican Radio and Osservatore Romano to discuss the 2015 annual report in May 2016. They said the Vatican and the Church needed the IOR as a financial institution that allows for transfers of payments to occur and the different agencies in the Vatican economy to function. As well as supporting the Pope in his mission. IOR offers payments, services to the various institutions and the various dicasteries (departments) of the Holy See. In addition, IOR offers wealth management. IOR helps congregations, dioceses and institutions of the Holy See and the Vatican City State to manage their assets, providing short term interest bearing cash accounts or asset management products.
Director-General Mammi blamed the failings of the unreformed IOR on human weaknesses and the absence of rules, of a system and of strict norms. He insisted, however, that the IOR was absolutely clean. Major work on reorganising the clientele had been carried out based on precise regulations that enforced well-defined procedures and rules and effective frameworks, advances from which it will be impossible to retreat.
On the issue of alleged money laundering by the Mafia, for example, President Franssu said it was not possible to go into the details of some of the legacy issues facing IOR. He admitted that in the past IOR had been affected by a series of abuses. Some of them had been in the real estate sector, others in the securities sector. IOR had done significant work to understand what had happened and why and to seek justice so that whatever was taken away from the IOR — therefore, away from the Holy Father — was given back. (How that would be achieved was left unclear). He was adamant that because of the framework that had been put in place such abuses would never recur. These days IOR was no different from any other financial institution. In the world of finance there is always risk but IOR was now as good as any international financial or banking institution in the world.
President Franssu pointed out that the percentage of equities in IOR’s proprietary portfolio was very limited: 1.7%. The bulk of this portfolio was invested in sovereign fixed income. In the future if IOR started increasing the level of equity they would need to put in place very clear sets of socially responsible investment criteria.
President Franssu also addressed the important issue of the future of the IOR and its reputation as a vehicle for money laundering and tax evasion. He claimed it was impossible to launder money at IOR whatever might have happened in the past because IOR now had very strict definitions as to which clients could have an account there. All the team at IOR had been trained to know, understand, respect and follow these rules. Secondly IOR was putting in place tax agreements with countries where customers were domiciled.
The IOR now gives its profits to the Cardinals’ Commission and, hence, makes them are available to the Pope for his pastoral mission. The novelty in 2015 was that the contribution came only from the actual profits, and not the capital. This is significant not only in budgetary terms but also as a sign of the strength of the IOR, which has guaranteed its capitalisation. This is important, because it is creating trust both for the financial community and for IOR customers, since not drawing on capital means the IOR’s work has been carried out very well. The smaller amount given in 2015 reflected the difficult market environment.
Pope Francis knows the damage that has been done to the credibility of the church by this very small bank and its history of scandals. While there is a sense of cautious optimism among technical ¬advisers in Rome and beyond at operational level (IT and handbooks, staff training, processes and fact-checking) there is still tension between the financial authorities and the Vatican. There is an unresolved conflict between the requirements for transparency which prevents improper transactions such as tax evasion and money laundering and genuine needs for secrecy when sending money to such sensitive places as Cuba, Egypt and the Middle East. Among what remains to be agreed are the criteria by which transactions can be left opaque. Resolution will come from corporate political will. The creation of the will to complete the reforms and develop a reform-minded culture for the future was the purpose of Pope Francis’ major policy statement to the Curia in December 2016.
The Pope said curial reform would only work if the men and women who work in the Curia are renewed and not simply replaced. “Without a change of mentality, efforts at practical improvement will be in vain.” Hidden resistance came from “hardened hearts content with the empty rhetoric of a complacent spiritual reform”, while malicious resistance sprang up “in misguided minds and comes to the fore when the devil inspires ill intentions… [which] hides behind words of self-justification and often accusation”. The Pope concluded by praying that through Christ ‘’we can heal all our pride and all our arrogance’’.
What this article has described is the evolution of the Vatican bank — the professionalization, the governance, the discipline, the controls, and the very close cooperation in the relationship between the Directorate, the Board of Superintendence, and the Cardinals’ Commission. The abuses which have been proved to have taken place in the past damaged the Church’s mission, scandalized the faithful and brought shame on the Church not only in the eyes of its enemies but also among people throughout the world. Trust in the Vatican bank should rapidly recover among the financial community and the regulators. But it may take many years of patient toiling, not to mention skilful public relations, to regain general trust and respect for the Catholic church at a time when its pastoral mission, above all to the poor and oppressed, is more sorely needed than ever before.