Can Pope Francis clean up God’s bank? (Part II)

The Vatican bank is a comparatively recent institution. Until 1887 Pope Leo XIII hid the Vatican’s ready wealth – a trunk full of gold coins – under his bed. That year he decided to found the Amministrazione per le Opere di Religione to gather more money to do good works. It was only in 1942, at the height of the second world war, that Pope Pius XII gave the organisation a new name and a clear banking mission. Its job was to protect church assets from both Nazi and communist threats.

But the new bank was also used to hide from the British and the Americans the deals that the Roman Catholic church in Germany was doing. Some reports suggest that the Vatican was dealing in German insurance policies that benefited from the fact that German insurers did not have to pay out on policies bought by Jews who died in the Holocaust – because their relatives could never certify the deaths. One 1946 memo from a US Treasury agent reported that about $225m in stolen Nazi gold had ended up at the Vatican.

 An ATM in the Vatican City.

In the 1980s Pope John Paul II used the IOR to send money to Solidarity, the Polish trade union movement that played a key role in triggering the fall of communism in eastern Europe. With the Polish pope’s approval, millions of dollars of covert US aid passed through the Vatican bank to Solidarity. William Casey, the director of the CIA, used to fly to Rome regularly to brief the pope on the fight against communism in eastern Europe.

There were suspicions that the bank was used in the 1990s to fund the Contras in Nicaragua and other anti-communist guerrillas in Argentina, El Salvador, and Honduras in operations that reportedly had the blessing of John Paul II. But the dubious dealings continued after the cold war ended. In June 2013, the Vatican’s own financial watchdog uncovered suspiciously large cash withdrawals and deposits in Vatican bank accounts held by the Vatican embassies in Iran, Iraq, Syria and Indonesia.

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A system aimed at getting money speedily and secretly to difficult places had obvious operational advantages, but it had a big downside too. It became an easy target for those who wanted to use it for criminal purposes. Throughout the 1970s and 80s the chairman of the bank was an American, Archbishop Paul Marcinkus, from Cicero, Illinois. In the 1970s Marcinkus started doing business with Roberto Calvi, president of the Banco Ambrosiano of Milan, who turned out to have links with the Sicilian mafia and the masonic lodge known as Propaganda Due (P2), whose members included powerful figures in the Argentinian military junta. On Calvi’s instructions, banks in Peru and Nicaragua loaned “hundreds of millions of dollars” to companies allegedly under Marcinkus’s control. One of them was said to have financed the purchase of Exocet missiles for Argentina during the Falklands war.

In 1982 the Banco Ambrosiano dramatically collapsed. In the aftermath, it emerged that its main shareholder was the Vatican bank. Calvi had set up 10 shell companies in Panama, nominally controlled, via a Luxembourg subsidiary, by the Vatican bank. He had borrowed $600m from 120 foreign banks and lent it to the shell companies, then used the money to manipulate the share price of the Banco Ambrosiano. One of the directors of Ambrosiano Overseas, which was based in the Bahamas, turned out to be Marcinkus – who once observed: “You can’t run the church on hail Marys.” A $1.3bn black hole was found in the Banco Ambrosiano accounts. Calvi fled the country on a false passport, and in June 1982 was found hanged under Blackfriars bridge in London.

The Vatican insisted it had no responsibility for the collapse of the bank but nonetheless agreed in 1984 to make a $244m “goodwill payment” to Ambrosiano creditors. Three years later, investigating magistrates in Milan issued a warrant for Marcinkus’s arrest for “complicity in fraudulent bankruptcy”. The warrant was never executed, because the archbishop hid away in the sovereign Vatican state.

The scandal came as a severe shock to Roman Catholics around the world. It cost the Vatican hundreds of millions of dollars in legal battles with the Italian authorities and did immeasurable damage to the moral authority of the church. The shadow of shame that fell across the Vatican bank has never fully lifted.

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A view of the dome of St Peter’s Basilica at the Vatican. Photograph: Filippo Monteforte/AFP/Getty Images

After the terrorist attacks of 11 September 2001, the world’s financial authorities, at the behest of the US government, began to crack down on money-laundering. What previously had been seen as a merely criminal matter became an issue of national security since it could potentially disguise the financing of terrorism. International authorities steadily increased the pressure on private banks that failed to comply with new standards. The Vatican bank, with 25% of its business in cash, and so many of its dealings conducted in secret, was an obvious target: senior officials in the European Union persuaded the Bank of Italy to launch an investigation of its dealings.

It was not long before the additional inspections and demands for information yielded results. In December 2009, a routine anti-money-laundering investigation at a UniCredit bank branch, just down the road from the Vatican, found payment slips from several unnamed account holders of the Vatican bank. But when the authorities asked IOR officials to identify the senders of the money, they were told: “Our laws don’t require us to tell you.”

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The Vatican was a natural tax haven. It was an offshore bank in the middle of Rome that Italians could enter merely by waiting for the traffic lights to change from red to green. In line with the Roman Catholic church’s traditional aversion to transparency, the bank authorities adamantly refused to cooperate with the Bank of Italy’s investigation.

The Bank of Italy switched its attention to the 40 commercial banks – known as “correspondent banks” – around the world in which the IOR held accounts and through which it moved billions of euros a year. In September 2010, police discovered €20m being transferred from an IOR account held at the Rome branch of Credito Artigiano to a JP Morgan account in Frankfurt. A €3m payment had been ordered from the same account to another account with the Banca del Fucino in Rome. Both of the recipients were identified only by their IBAN codes. The Vatican bank failed to furnish information on the origin or destination of the funds, as Italian law required. So, in September 2010, Italy’s financial police seized the €23m from the two IOR accounts. Other banks, under pressure from regulators to provide information, asked more and more questions about IOR transactions. The 112 staff at the Vatican bank, mainly Italians, could not, or would not, answer them.

In March 2012, American bankers forced the IOR to close the account it held with the US bank JP Morgan. The IOR had moved €1.5bn through that one account in the previous 18 months. In July, the Council of Europe’s anti-money-laundering body announced the Vatican bank was non-compliant on seven of its 16 core standards.

The Bank of Italy forced all banks in Italy to close their IOR accounts. The pressure was intensified when the German banking giant Deutsche Bank acted. Its Italian subsidiary managed the Vatican City State’s 80 cash machines and credit card terminals. On 1 January 2013 Deutsche Bank closed them all down. With tourists only able to pay at shops and museums in cash, the Vatican was losing €40,000 a day. The Vatican bank was on the brink of collapse.

A few weeks later Pope Benedict XVI dramatically announced his resignation: the first pope to do so for more than 500 years. He was, he said, “no longer physically, psychologically and spiritually capable of handling the duties of office”. The turmoil at the Vatican bank – along with the intrigue and infighting inside the Curia, the Roman bureaucracy, which had been laid bare by the Vatileaks documents leaked by Benedict’s butler – contributed to the burdens Benedict felt he was no longer able to carry.

Benedict’s resignation came as a nasty surprise to those in the Curia and the bank who had been taking advantage of the old pope’s frailty and of his inclination to pursue theological matters rather than sound administration. Benedict had, in fact, been aware of the problems and had tried to handle them. He had created a financial regulator, the Autorità di Informazione Finanziaria (AIF), to be a watchdog over all Vatican finances. He had appointed an outside banker, Ettore Gotti Tedeschi, to take over the presidency of the Vatican bank in 2009. But Benedict was outmanoeuvred by those in the Vatican who wanted nothing to change.

Perhaps the most formidable member of the old guard was the secretary of state, Cardinal Tarcisio Bertone, a man with a fondness for vestments of fine Italian filetto lace and gold-embroidered mitres set off with a sporty pair of aviator sunglasses. He was a man who became so powerful as Benedict’s first minister that insiders called him the deputy pope. Bertone had been a controversial figure from the outset. The job of secretary of state requires significant diplomatic experience, which Bertone lacked. His background was in disciplining rebellious priests and theologians.

 

Cardinal Tarcisio Bertone. Photograph: AFP/Getty Images

Complaints about him began almost as soon as he took over the top job and started replacing experienced staff with his own people. The Vatileaks documents revealed that he had personally reprimanded the reformist Vatican governor, Archbishop Carlo Maria Viganò, for reporting detailed evidence of nepotism, cronyism and crooked property deals within the Vatican. Soon after, Pope Benedict accepted a recommendation to transfer Viganò from the Vatican to Washington. Other cardinals were so alarmed by this cover-up they sent a delegation to Benedict asking for Bertone to be removed. Among the charges laid against him were poor management, inept diplomacy and inadequate supervision of the Vatican bank. But Benedict refused to sack his old friend.

Things got worse. In January 2012 Bertone’s allies forced through a measure removing the independence of the AIF watchdog, compelling it to report to Bertone. When the cardinal wanted the Vatican bank to invest €15m in an Italian TV and film production company, Lux Vide – founded by a friend of Bertone – Gotti Tedeschi refused. In March 2012 Gotti Tedeschi was fired, and Bertone proposed the deal once more. “The message was: ‘The boss wants this,’” a Vatican source told me. The money, which has since been written off, went through.

Benedict stepped down on 28 February 2013. In their conclave, as they discussed his possible successor, cardinal after cardinal stood up and criticised Bertone personally, the Curia generally and the bank in particular. The next pope would have a clear mandate for reform