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Power Struggle on Reforming Vatican Bank

The Vatican
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The Vatican

Negotiations over the Vatican's adherence to international banking standards were reaching a delicate point. During a lunch, a European official later recalled, discussion turned to the need for more openness from an institution steeped in centuries of secrecy.

A Vatican representative at the meal, annoyed by the requests for more information, shouted, "How can you ask us such questions?"

The clash came amid mounting pressure on the Vatican to clean up its bank — for decades the subject of dark intrigue and linked to one mysterious death — as part of a push by the European Union to apply common rules to all the countries and micro-states like Vatican City and Monaco that use the euro.

(Read More: Without a Pope or a Prime Minister, Rome Is Uneasy)

Those pressures continued until the very last days of Pope Benedict XVI's papacy and remain a critical issue for the cardinals now meeting to elect a new pope. As the conclave begins Tuesday, the specter of financial scandal presents a special challenge for Benedict's successor, who must modernize the Roman Catholic Church's finances or risk the Vatican's access to the global banking system, undermining its moral authority and its financial stability.

Ahead of the conclave, the cardinals were briefed on the Vatican's finances and have been debating whether a member of the Vatican hierarchy or an outsider would be better at imposing order after a papacy bedeviled by crises of governance. The battle lines are hazy, but the fight over the Vatican's finances pits different factions inside the Vatican against one another, some seeking greater transparency and others who want to preserve the institution's tradition of secrecy.

Founded in 1942 and housed in a small round tower at the foot of the Apostolic Palace, the Vatican bank generally does not give loans but manages deposits and patrimony for religious institutions, clerics and diplomats accredited to the Vatican, who are among the only depositors allowed to hold accounts there.

During the cold war, the bank was widely seen as a back channel to transfer money to the Eastern Bloc to help end Communism, and today the Vatican uses the bank to help it operate in sensitive areas like Cuba and China, Vatican experts say.

(Read More: How the Pope's Retirement Package Compares to Yours)

But largely because of the Vatican's reluctance to reveal its account holders to outside authorities — and especially to subject itself to scrutiny of past transactions — suspicion has swirled for years about whether some of its accounts had ties to organized crime or Italian political slush funds.

In 2011, the only time for which figures have been made available, it had 20,772 clients, 68 percent of them members of the clergy, and $8.2 billion in assets under its management. The bank has said it has around 33,000 accounts.

In recent years, Italian prosecutors have become more aggressive in investigating whether accounts held there by clerics might in fact be fronts for other interests. Last July, the Italian authorities arrested a priest on charges that he allowed a lawyer to use his Vatican bank account to commit insurance fraud.

Officials at the European Union in Brussels and agencies that monitor financial institutions say the Vatican has made significant strides in meeting norms against money-laundering, but that it still has some way to go.

Some in the Vatican are eager for change, but "you should not underestimate the resistance on issues of transparency" from tradition-bound forces, the European official said.

Under Benedict, the Vatican bank pledged to join the so-called white list of countries that meet international banking standards. In one of his final acts as pope, Benedict appointed a German aristocrat, Ernst von Freyberg, as the bank's new president.

The appointment loosened the historic grip on Vatican finances by a small and tight-knit group of Italian insiders, some of whom had fiercely resisted efforts to come under outside scrutiny. They were protective of the bank as an essentially Italian institution, which critics said was perilously close to the country's scandal-prone political and financial establishment.

Last May, the Vatican bank ousted its president, Ettore Gotti Tedeschi, a well-connected Italian banker, in a rare boardroom coup, accusing him in a public statement of incompetence. Mr. Gotti Tedeschi had come under intense scrutiny in 2010, when magistrates in Rome impounded $30 million from two external accounts used by the Vatican bank and placed him and the bank's director general, Paolo Cipriani, under investigation in a case related to money laundering. Both denied the allegations.

The money was later restored to the Vatican bank, known as the Institute for Works of Religion, after the Vatican created its own Financial Intelligence Authority with a papal edict issued by Benedict in December 2010 to meet European anti-money-laundering directives.

The continuing Rome investigation is the first into the bank since the early 1980s, when Italy's Banco Ambrosiano, in which the Vatican had investments, collapsed after the disappearance of $1.3 billion in loans to companies in Latin America. Its chairman was found dead in 1982, hanging from Blackfriars Bridge in London. The Vatican bank denied wrongdoing but paid $250 million to Banco Ambrosiano's creditors.

In recent years, the Vatican has made progress but continues to lag in meeting international banking standards. Last July, a report by Moneyval, a monitoring agency under the Council of Europe, said that in the two years since it was created, the Vatican's new Financial Intelligence Authority had flagged only two suspicious transactions.

Last October, the Vatican appointed a new head of the authority, Ren Bruelhart, a 40-year-old Swiss lawyer who had helped take Liechtenstein, famous for its banking secrecy, off the black list of countries that do not comply with banking standards. Mr. Bruelhart's appointment, like that of Mr. von Freyberg, raised hopes of those seeking greater transparency and to open up a tradition-bound financial apparatus long dominated by Italians.

Further outside pressure on the Vatican to mend its secretive ways has come from the European Commission, the Brussels-based executive arm of the 27-nation European Union, and from rule changes brought about by the introduction of the euro in 1999.

In December 2000, the Vatican signed a monetary agreement in order to use the euro in its tiny territory and to issue coins bearing the marking Citt del Vaticano as well as commemorative coins, which it sells at considerable markup to tourists and others.

But the agreement, to the dismay of officials in Brussels, included none of the commitments made by most other euro-using countries to combat money laundering. The European Commission demanded that the accord be revised.

Eventually, the Vatican signed a new deal with Brussels in December 2009, which included an unprecedented restriction on the Vatican's autonomy: a commitment to accept the jurisdiction of the Luxembourg-based European Union Court of Justice in settling disputes over the monetary deal with Europe.

"This was a big novelty, a historic step," the European official said. "For the first time in history the Vatican recognized a superior authority that is not God."

Last June, Mr. Cipriani, the bank's director general, told reporters on a rare tour of the Vatican bank that it had originally signed on to money-laundering standards monitored by Moneyval in order to continue issuing euro coins.

"We couldn't print coins with the Holy Father's image, that's why we're working on all this," he said, standing beneath a frescoed ceiling depicting "Mother Church" and answering questions submitted in advance. Bank managers in dark suits stood silently on the sidelines.

The Vatican was "fully committed to the line of transparency," he said, adding, "We need to take away the veil, the shadow" that had fallen over the bank.

But the shadow grew longer. On Jan. 1, the Bank of Italy, which has placed the Vatican bank under intense scrutiny, blocked Deutsche Bank Italy from operating financial services at the Vatican, including the use of credit cards at its museums, after the Vatican failed to meet a Dec. 31 compliance deadline. The Vatican contested the move. Last month, the Vatican announced that it had found a consortium in Switzerland, which does not belong to the European Union, as a replacement.

The fact that the Vatican chose a Swiss firm to manage financial services inside the Vatican "isn't a good, transparent sign," said Carlo Marroni, a Vatican expert with the Italian business daily Il Sole 24 Ore.

But he said there had been some change. "In the past they were certainly considered a fiscal paradise," Mr. Marroni said. Today, they have improved, but are still in a gray zone. "They did a bit more than the minimum, but it's still insufficient," he said. "They took only the steps that they couldn't not take."

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