After last week’s gruelling yet ultimately successful visit to the UK, arguably the most challenging mission of his reign – amid an exchange of accusations over child abuse scandals and secularism – Pope Benedict, at 83, could have been forgiven for seeking rest with his cats in the Vatican’s tranquil gardens upon his return.
Any repose was broken on Tuesday morning, however, when alarm began to mount in the nearby medieval bastion of Nicholas V, home of the city-state’s bank.
News was emerging that Italy’s finance police had frozen €23m held by the Vatican in an account at an Italian bank, and that the Pope’s two most senior banking officials were under investigation for possible money-laundering.
Reacting with unusual speed, the Vatican issued forceful denials of the allegations. It expressed “perplexity and amazement” at the probe and full confidence in the Institute for Works of Religion (IOR), as its bank is known, as well as in Ettore Gotti Tedeschi, chairman, and Paolo Cipriani, director-general, the suspects under investigation.
By the end of this week, calm was being restored by the damage-limitation exercise. The Bank of Italy had five days earlier flagged the Vatican’s non-compliance with anti-money laundering regulations in attempting to make two transfers to unidentified beneficiaries for unstated purposes.
By now, though, officials from the bank and the Italian government were privately lending credence to Vatican insistence that the affair was simply a “misunderstanding” between IOR and Credito Artigiano, the bank where the account in question was held.
Nonetheless, veteran Vatican observers say, the events are a harsh reminder of the culture of secrecy that has cloaked the Holy See’s murky financial dealings, representing the most serious challenge for Pope Benedict after the child abuse scandal that has ripped through European dioceses in the past year.
“This is only the beginning. It will take a long time to clean up IOR,” says Gianluigi Nuzzi, author of Vaticano SpA (“Vatican Inc”) who lifted the lid last year on the bank’s allegedly nefarious connections, among others with Vito Ciancimino, a Sicilian mayor convicted of Mafia association who died in 2002.
Those accusations – ignored by the Vatican – followed the scandals of the 1990s Enimont trials, involving use of IOR accounts for bribes passed to Italian government officials, and the collapse in 1982 of the partly Vatican-owned Banco Ambrosiano whose boss, Roberto Calvi, was found hanging from London’s Blackfriars bridge.
It was against this background, upon his election in 2005, that Benedict acted relatively quickly to put right the financial problems he inherited, bringing it into line with global norms aimed at countering money-laundering and terrorist financing.
Peter Sutherland, Ireland’s former attorney-general and European Union commissioner, and Lord Camoys, a veteran UK banker, were brought in to advise the Administration of the
Patrimony of the Apostolic See (Apsa), which acts as a central bank.
The shake-up was completed a year ago when Mr Gotti Tedeschi – devout Catholic, banker and professor of ethics in finance – was put in charge of IOR. Then, in January, Attilio Nicora, an Italian cardinal and president of Apsa, was appointed head of a special IOR unit, tasked with bringing it into line with Organisation for Economic Co-operation and Development anti-money-laundering norms with the aim of inclusion on the “white list” of compliant jurisdictions.
“To this end, intense and fruitful contacts are ongoing with the Bank of Italy, the European Union and with the competent international bodies: OECD and GAFI (Financial Action Task Force),” said Federico Lombardi, Vatican spokesman, in a letter to the Financial Times this week.
Mr Nuzzi and Vatican insiders credit Mr Gotti Tedeschi – non-executive chairman of Banco Santander’s consumer finance unit in Italy – for his efforts at IOR. “He is certainly there to clean up,” says Mr Nuzzi, who believes this week’s incident was the result of a “treasury glitch”.
“But accounts [at IOR] are not always in the name of a physical person, some are not traceable, they might be in the name of organisations that are not immediately definable. Also there are different layers at IOR that are difficult to penetrate even for IOR representatives.”
Running worldwide aid and development agencies with assets second in size only to those of the UN, the Holy See needs to manage significant sums and has been reported to hold more than $200m in US Treasuries.
One of the disputed attempted transfers this month was, IOR says, being made to an IOR account at JPMorgan Chase in Frankfurt to buy €20m in German government bonds.
Notable Catholics not directly linked to the Vatican also hold accounts with IOR, which does not publish accounts but is believed by Italian bankers to hold assets in the range of €5bn.
Exercising its autonomy as a sovereign state, the Vatican has used IOR to get round global sanctions, channelling money to Poland’s Solidarity movement in the 1980s and funding to Cuba in spite of the US embargo.
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The benefits and pitfalls of that treasured unaccountability and secrecy are being addressed by Mr Gotti Tedeschi, whose clean-up mission is mirrored by the more thorough vigilance exercised over Italy’s banking system by Mario Draghi as Bank of Italy governor.
He is described by some as a “Calvinist” in comparison with his Catholic close-to-the Vatican predecessor, Antonio Fazio, who resigned in 2005 amid a domestic Italian banking scandal.
The Bank of Italy has no jurisdiction over IOR but twice this year it has issued a circular to Italian banks reminding them of the regulations they must follow in executing transactions by IOR, classified as a non-EU bank outside the “white list”.
The latest, on September 9, sent shockwaves through some institutions, which interpreted it as a warning not to do business with IOR – an interpretation rejected by the central bank.
Their concerns were heightened by a separate series of Italian judicial probes into an alleged “secret organisation” – possibly involving prominent officials and businesspeople – suspected of corrupting the judiciary and fixing government tenders.
One of those probes has included Naples’ Cardinal Crescenzio Sepe in his former role as head of the Congregation for the Evangelization of Peoples, which manages much of the Vatican’s property. He has denied wrongdoing and the Vatican has pledged its co-operation with the inquiry.
With some of his closest associates under investigation, Silvio Berlusconi, centre-right prime minister, has – not for the first time – branded the investigations as the efforts of politically motivated magistrates bent on undermining the government.
Those claims have been echoed in some commentaries on the probe into the Vatican. Mr Gotti Tedeschi, who was not available to speak to the FT this week, was quoted by Il Sole 24 Ore, a business daily, as saying the “procedural error” over the transfers was being used as “a pretext to attack the Institute, its president, and more broadly the Vatican”.
He did not elaborate.
A well-placed Italian official, who asks not to be named, accepts Mr Gotti Tedeschi’s procedural explanation but also offers a further possible explanation.
He says IOR had tried to carry out an ostensibly legitimate transfer of funds from one account to two others but without submitting the required details.
The official says he believes IOR was testing “the Bank of Italy to see if they were serious about these anti-money-laundering norms”.
“The Bank of Italy showed they were serious. So IOR understood it cannot move on to more complicated issues,” he says.
The official and two banking sources say IOR repeatedly stalled when asked for more information on the transfers. Asked what could lie behind IOR’s “testing” of the system, the official admits it is a mystery.
“Perhaps they want to go back to their past special status. But the world is more complicated these days. Perhaps it is just their culture of secrecy,” he says. “Who knows?” IOR has declined to comment to the FT.
Italian officials note that the freezing of IOR’s money was an automatic consequence of the Bank of Italy’s notification of non-compliance with Italian norms, which followed an alert by Credito Artigiano. The Credito Valtellinese group, which owns Credito Artigiano, says it has no comment.
Although the investigation by Rome magistrates continues, a Bank of Italy official, who asks not to be named, stresses: “This is not another Banco Ambrosiano or Enimont.”
Benedict is preparing for another milestone next weekend with his first visit to Sicily. There he is expected to commemorate the death of Father Pino Puglisi, killed by the Mafia in September 1993.
Just four months earlier, John Paul had gone to Sicily to make an impassioned plea for its people to rise against the Mafia.
As with other long-standing issues, not least finance, the Pope will again be confronted with the problems of his predecessors.
SIC: FT/INT'L