It is a crime plot that could have been plucked from the pages of an Ian Fleming novel. A trio of men – a secret agent, a financial broker and a man of the cloth – hire a plane in Italy and fly to the Swiss town of Locarno on the banks of Lake Maggiore, an unlikely setting for a white-collar crime.
There, they collect €20m (£17m) in cash, with the intention of flying it back to Italy without paying taxes. But before the plane can leave Locarno, the broker reneges and the plot is spectacularly made public. Back in Rome, an investigation into corruption and fraud is launched and the trio are charged and locked up at Regina Coeli, a notoriously hard-knock prison with some 900 inmates. For two of the party, the story ends there. But for the man of the cloth, Nunzio Scarano, the plot’s repercussions were entwined with his position within the Holy See.
The time has come for the IOR to be regulated in the way all other banks are. Nothing less will do, for its sake, for Catholicism’s sake and for the sake of international banking
At the time of his arrest on 28 June 2013, Scarano was director of the accounting analysis service of the Administration of the Patrimony of the Apostolic See (APSA), the Vatican equivalent of the Treasury.
Never mind that APSA is entirely separate to the Institute for Works of Religion (IOR), the official name for the Vatican bank; or that Scarano had been suspended from APSA one month earlier – his arrest sparked calls for greater transparency and more rigorous scrutiny of the Vatican’s finances. As John Thavis, author of The Vatican Diaries, put it: the scandal appeared to confirm suspicions that the bank, which oversees €6.3bn (£5.2bn) in assets, “continues to be used as an offshore haven”.
Were this an isolated incident, it might have blown over. But the case of Monsignor 500, as Scarano was nicknamed for his supposed habit of flashing high-denomination banknotes, is just one in a series of well-documented allegations against the Vatican and its bank.
Speaking on the brink of Scarano’s trial, which began on 3 December 2013, Richard Murphy, director of Tax Research UK, said: “The IOR seems to have believed that being an agent for God has exempted it from the rules of man, but the evidence is that it has been as fallible as any other human organisation.
“The time has come for the IOR to be regulated in the way all other banks are. Nothing less will do, for its sake, for Catholicism’s sake and for the sake of international banking.”
An external evaluation into the operations of the Holy See, released in July 2012, drew similarly concerning conclusions about the IOR and its regulator. Conducted by Moneyval, a monitoring body within the Council of Europe, the report concluded that “further important issues still need addressing”. Of the bank’s regulator, the Financial Information Authority (FIA), it added: “There appeared to be a lack of clarity about the role, responsibility, authority, powers and independence of the FIA as supervisor… [It] does not appear to have adequate powers to carry out its supervisory duties.”
Surprisingly, Pope Francis appears to be listening. Since his appointment in March, he has instigated one of the biggest shake-ups since the IOR was established in 1942, building upon measures introduced by his predecessor Benedict XVI. The IOR published its annual report in the public domain for the first time ever in October, just months after hiring American consultancy firm Promontory Financial Group as regulatory consultant.
The FIA also signed memoranda of understanding with Italy, Germany, Spain, Belgium and the US, making it easier to exchange information to prevent money laundering and the financing of terrorism. Which explains why, when Moneyval delivered its second evaluation in December, it concluded that the Vatican had made “significant progress” in financial reform.
Reverend Davide Cito, professor of canon law at the Pontifical University of the Holy Cross, agrees: “The fact that the IOR is in the process of putting itself through a series of external chains and controls is a very positive move. It shows a desire for transparency and accuracy in the international context in which it operates.”
Nigel Baker OBE, British ambassador to the Holy See, adds: “Even basic steps like publishing better accounts and opening the IOR to outside scrutiny are gradually changing its image for the better.”
But the question remains: is it enough?
History of scandal
Allegations of corruption and scandal are certainly not new. In a somewhat astonishing accusation, Edward Jay Epstein, author of The Annals of Unsolved Crime, claims that the very foundations of the IOR are tangled in serious corruption. In a Huffington Post article published in April, he claims the concept of the IOR first emerged in 1929 when the Vatican hit financial difficulty: “To get a high return, the Popes used the Vatican’s sovereign status to set up a no-holds-barred offshore bank under the guise of an Institute For Religious Work.”
By the time Banco Ambrosiano, then Italy’s largest private bank, of which the IOR was a shareholder, collapsed in 1982 amid fraudulent bankruptcy claims, the Vatican bank’s reputation was irreversibly scarred. The IOR denied any wrongdoing and gave Banco Ambrosiano’s creditors $250m (£152m) as a “goodwill payment”.
“It was a standing joke that whenever a journalist wrote an article about the IOR, it had to include a mention of Roberto Calvi under Blackfriars Bridge, and the Banco Ambrosiano,” says Baker, with reference to the subsequent murder, thinly-veiled as suicide, of Banco Ambrosiano chairman Calvi, whose links with the Vatican were so strong he was nicknamed “God’s banker”.
One of the most troubling aspects of the affair was the response of IOR’s then-president Archbishop Paul Marcinkus. To avoid being served court papers by Italian authorities, Marcinkus, who was indicted as an “accessory to fraudulent bankruptcy”, claimed diplomatic immunity and hid behind Lateran Pacts that provided for independence of the Vatican City State.
“The real scandal was Marcinkus’s administration and the IOR/Ambrosiano crimes,” says Professor Alberto Melloni, Vatican historian and director of the John XXIII Foundation for Religious Studies, when asked to what extent the Scarano scandal has, by association, damaged the IOR.
Yet most damaging of all in recent years was the so-called Vatileaks scandal of 2012, when Pope Benedict’s then-butler Paolo Gabriele was accused of leaking hundreds of private letters and sensitive documents, some pertaining to Vatican finances, which were published by Italian investigative journalist Gianluigi Nuzzi in his book His Holiness: The Secret Papers of Benedict XVI.
Each new allegation or hint of financial scandal that followed – whether proven or unproven, and whether directly related to the IOR or not – further tarnished its reputation. As Thavis commented in the middle of 2012, the Vatican “seemed to be unravelling”. So when an Italian branch of JP Morgan Chase closed the Vatican bank’s account in March, offering no formal statement or explanation, the reason was widely reported as being the IOR’s lack of transparency. Italian newspaper Il Sole 24 claimed that it was concerned that the IOR had failed to provide sufficient information on money transfers.
Similar questions were raised when Pope Benedict resigned last February due to advanced age, the first pope to abdicate in almost 600 years. “The more one thinks about the sorry state of affairs in Rome, the less likely it seems that Pope Benedict’s abdication was motivated only by his age and frailty,” wrote Alexander Chancellor, former editor of The Spectator and former Rome correspondent, in an article published shortly after. “He may well have felt sick to his stomach about the problems with which he had to deal.”
By the time Ettore Gotti Tedeschi left his role as president of the IOR in May 2012 – amid conflicting reports either that he resigned after a stormy row with “deputy pope”, secretary of state Cardinal Tarcisio Bertone (who himself stepped down in October); or that he was sacked after a police raid on his home uncovered, according to Epstein, “47 binders of Vatican documents, some of which exposed the Vatican Bank’s loopholes for laundering money” – the IOR was not only fighting for its reputation but, by some accounts, for its future.
David Willey, the BBC’s Rome correspondent of more than 40 years, reported: “There has been speculation that one of Pope Francis’s options could be to dissolve the IOR altogether and hand over the Vatican’s entire banking operations to a reliable commercial bank.”
Yet the Vatican has recognised the need for change – and has acted. It began slowly; first by establishing the FIA in December 2010 and then, in February 2011, when Bertone wrote to the secretary general of the Council of Europe, requesting an evaluation that resulted in the two Moneyval reports. It also ran a series of so-called transparency tours, allowing select guests a glimpse of its inner workings. Baker was among those invited on a May 2012 tour.
“That visit was a first step,” he says. “It also begged many questions… [but] it was a way of showcasing the process of change. Since then, however, that process has gone much deeper, involved many more people including outside agencies, and cast a brighter light on the IOR than perhaps some of those who organised the tour might have imagined.”
In a 12-month blitz of unprecedented reform dubbed Operation Transparency, the Vatican has addressed longstanding concerns about its financial institutions. In May, the Promontory Financial Group was hired for a regulatory review, which will continue until mid-2014; in June, Pope Francis appointed a Pontifical Commission, comprising five experts, to produce a report into the IOR’s operations; and in August, a decree was passed extending the FIA’s “prudential supervision” role, to encompass all Holy See entities involved with financial activities.
Markus Wieser, spokesman for the IOR, said: “A major issue that had been raised in 2012 by Moneyval regarding the IOR was that the Institute needs to enhance its customer due diligence. The IOR has undertaken a major effort since March to improve its internal procedures to fully comply with international standards, as laid down in Vatican law.”
Part of this is the Promontory review, involving a risk assessment of the IOR’s 18,900 account holders. Wieser says: “Promontory started with accounts in the high-risk classes, and these were finished at the end of July. They reviewed roughly 10,000 customers by the end of 2013 and we expect the task to be finished in the first half of 2014.”
Yet the most symbolic of all changes was the publication in October 2013 of the KPMG-audited annual report; the first time an annual report has been published in the public domain since they started being produced in 1996. Though it was a fairly bare bones document, it laid out the IOR’s key figures for 2012, including its net profit of €86.6m (£73m), up from €20.3m (£17m) in 2011, and marked a significant step forward.
As David Blair, head of financial regulation at Osborne Clarke, says: “The first annual report demonstrates a desire to publicly appease those whose faith in the bank has been shaken."
Culture of change
But why this change began at all remains unclear. After all, the IOR enjoyed 70 years with a reputation as the world’s most secretive bank, so why begin addressing these questions now?
The appointment of Pope Francis, known for his relaxed but direct manner, has accelerated the rate of change. Melloni says: “The style of the new Holy Father has reversed the situation in an impressive way.” Yet some of the earlier changes, including the formation of the FIA, began in 2010, midway through Pope Benedict’s reign.
That this was the same year IOR’s then-president Tedeschi was being investigated as part of a money-laundering inquiry is wholly unrelated, according to Vatican insiders. A source within the Vatican says: “There are a number of reasons for the Vatican taking a new approach to its financial institutions. One reason is that outside pressure has increased significantly.”
Certainly since 9/11, the global anti-money laundering regime has undergone a complete overhaul. The source adds: “As the IOR has always worked closely with foreign banks, this change did not go unnoticed within the Vatican walls. One might say the Vatican, belatedly, thus started to adapt to this new environment.”
The most important issue is for the bank’s leadership to receive internal challenge
However, the slow, steady approach has failed to impress everyone. Of the FIA, Willey reported: “promises of greater financial transparency clearly failed to materialise” from its creation. But insiders say even small steps take tremendous effort. The Vatican source says: “People who have been working here for 10 or 20 years are simply not used to change, even when that change seems minor.”
With reference to new IOR president, Ernst von Freyberg, who has publicly pledged to clean up the bank and improve vigilance, the source adds: “When Freyberg came in, his approach was quite different. He had to take the people with him and explain why he was doing this.”
His influence is already showing as, alongside legal and regulatory reforms, there has been a subtle change in behaviour. Nowhere is this clearer than in the treatment of Scarano, who was also investigated as part of a separate money laundering inquiry. Unlike Gabriele, who in October 2012 was sentenced to 18 months in prison for aggravated theft following the Vatileaks scandal, then released after only two with a public pardon from the Pope Benedict, Scarano has experienced no leniency.
“It is a positive sign that past malpractice has been brought to light, even if such stories generate bad press in the short term,” says Baker. “It means efforts to improve transparency and compliance are real, and that there is cooperation between Vatican financial authorities and those of other states. I would be more worried if everything appeared to be squeaky clean. No bank or financial institution anywhere in the world has 100% compliance.”
There is lack of consensus when it comes to deciding where the IOR should go from here. Some, including Murphy, believe that the IOR should be treated like any other private bank. Or that it should be held accountable to an external regulator that, unlike the FIA, operates outside the remit of the Vatican City State.
However, Blair argues: “The most important issue is for the bank’s leadership to receive internal challenge.” Like others, he believes the IOR should be recognised as the unique institution it is, and changes should continue to be determined by Vatican authorities.
Indeed, the IOR operates somewhat differently to other banks, not only because its core goal is to “serve the global mission of the Catholic Church”, but also because of its services. As Freyberg said in the annual report: “We do not serve business customers and we do not provide loans out of our deposit base, and barely offer any loans at all. We also do not engage in financial transactions such as hedges or swaps with our clients.”
However, the Vatican framework upon which the IOR is based is said to be swamped in organisational confusion, making it difficult to implement any change more significant or drastic than the ongoing piecemeal approach. In The Vatican Diaries, Thavis explains: “In theory, the Vatican operates according to a top-down structure of authority: in actual fact the Vatican is a patchwork of departments, communities and individuals, all loosely bound by a sense of mission but without comprehensive management or rigorous oversight.”
For now, though, the outlook is optimistic. December’s Moneyval report commended the changes made over the last year, in relation to the IOR and FIA. And Cito says: “personally I am very confident”.
But Baker, who sits near the heart of the Vatican and witnesses many of these changes first hand, is more pragmatic. “The direction of travel is the right one,” he concedes.
“It is, though, important to remember that there is never an ‘end state’ in relation to financial compliance. New challenges will continue to emerge and new measures will have to be applied to tackle them.”