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Pope to Review Vatican Bureaucracy, Scandal-Plagued Bank

Tuesday, 2 Apr 2013 | 12:43 PM ET
Pope Francis I
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Pope Francis I

Pope Francis, who has said he wants the Catholic Church to be a model of austerity and honesty, could restructure or even close the Vatican's scandal-ridden bank as part of a broad review of its troubled bureaucracy, Vatican sources say.

Francis, who inherited an organization mired in scandals over priests' sexual abuse of children and the leak of confidential documents alleging corruption and infighting in the Curia—Vatican's central administration—is mulling his options as he sets the tone for a more humble Holy See.

One of the tests of his papacy will be what Francis does about the bank, which has regularly damaged the Vatican's image over three decades and faces growing calls for reform.

(Read More: Vatican Finances: CNBC Explains)

Last year, a European anti-money laundering body found that the bank—formally called the Institute for Works of Religion, and known by the Italian acronym IOR—had failed to meet some of its standards on fighting financial crimes.

"Certainly if the pope wants to, he can close the IOR," said a senior Vatican official, a prelate with years of experience dealing directly with the bank. Its future is one of main issues confronting Francis, he said.

Any significant reforms would not come for some time and would probably be made after changes at the Secretariat of State, the church department at the center of the "Vatileaks" scandal that rocked the Holy See last year. Changes would include the replacement of its head, Cardinal Tarciscio Bertone, who is No. 2 in the Vatican hierarchy and has been widely blamed for failing to prevent the many mishaps and the infighting that occurred during Benedict's eight-year pontificate.

"It will take time [to change the bank]," said another Vatican official who is not a prelate. Both officials spoke on condition of anonymity.

The second official said that the bank, which manages money for the Vatican, international Catholic religious institutions and clerical orders, would probably undergo "serious restructuring" rather than being closed.

"But I would not exclude anything, including closing it down the line. Francis is doing surprising things every day," he said.

Both officials said the new pope might, as a first step, establish a committee to advise him on possible changes to the Vatican's financial structure.

The first sign of movement would be a new secretary of state. "It's not a question of if but when Bertone leaves," the senior prelate said. "It remains to be seen who the pope chooses as new secretary of state."

Crisis in the Curia

The Curia's basic failings were aired, sometimes passionately, at closed-door meetings of cardinals before they retired to the conclave that elected Francis on March 13.

"The Curia did not come out smelling like a rose from those meetings," the senior prelate said, adding that many cardinals had demanded explanations of the scandals and information on how the bank is run and whether it should exist at all.

"The IOR is not an essential part of the ministry of the Holy Father as a successor of St. Peter," Cardinal John Onaiyekan of Nigeria told an Italian television station before Francis' election. "The IOR is not fundamental, it is not sacramental, it is not part of [church] dogma."

(Read More: Power Struggle on Reforming Vatican Bank)

Anger at the Italian prelates who run the Curia was one of the forces behind the choice of the first non-European pope in 1,300 years, which quashed the chances of a front-runner, Milan Archbishop Angelo Scola.

The next secretary of state, the senior source said, would have to instill a new style of "collaboration and service" among offices of the Curia, whose image was badly stained by Vatileaks."

Before he resigned, Benedict left a secret report for Francis on the affair, in which sensitive documents alleging corruption and conflict over the bank's administration were stolen from the pope's desk and leaked by his butler.

The butler, Paolo Gabriele, was arrested and sentenced by a Vatican court to 18 months in prison last year, but Benedict pardoned him. He was freed just before Christmas.

Bertone has been directly linked to the IOR's recent troubles. He was the chief promoter of Ettore Gotti Tedeschi, an Italian who headed the bank until the board ousted him in May.

At the time, Gotti Tedeschi said he was fired because he wanted the IOR to be more transparent. But board members said it was because he had neglected basic management responsibilities and alienated staff.

In 2010, with Gotti Tedeschi still at the helm, Rome magistrates investigating money laundering froze 23 million euros ($33 million) the IOR held in an Italian bank.

Read More: (Italian Police Probe Vatican Bank Officials)

The Vatican said the bank was merely transferring funds between its own accounts in Italy and Germany. The money was released in June 2011, but the investigation continues.

In February, the Vatican named a German lawyer, Ernst von Freyberg, as IOR president, saying that he would contribute to the bank's modernization and transparency in its attempts to meet international standards. But the appointment, made two weeks before Pope Benedict resigned, was clouded by Freyberg's past business links to a military shipbuilder.

Bad Image

"The Vatican Bank or IOR, is not unique. They are not the worst [bank], but certainly there are very serious problems that need to be addressed," said E.J. Fagan, advocacy coordinator at Global Financial Integrity, an organization aimed at curtailing illicit money transfers.

"Pope Francis has very clearly stated that he wants to fight poverty," Fagan told Reuters. "Money laundering of illicit financial flows is a major driver of global poverty, and the Vatican should set a clear example."

The Vatican has been trying to shed its image as a suspect money center since 1982, when Roberto Calvi, an Italian known as "God's Banker" because of his links to the Holy See, was found hanged under Blackfriars Bridge in London.

Moneyval, a monitoring committee of the 47-nation Council of Europe, said in July that the Vatican had failed to meet all its standards on fighting illicit cash flows, tax evasion and other financial crimes.

The committee gave the Vatican an overall pass grade but failing grades on seven of 16 "key and core" aspects of its financial dealings. Moneyval found major failings in the bank's operation but acknowledged that the IOR was making changes to meet transparency requirements.

Five months before Moneyval's report, JPMorgan Chase closed the IOR account at its Milan branch because of concerns about transparency.

Italian media have reported that the IOR, which answers to a commission of cardinals and enjoys great autonomy, could be placed under the control of another Vatican department, increasing the oversight called for in the Moneyval report.

Famiglia Cristiana, Italy's leading Catholic weekly, called for IOR funds to be administered by an independent "ethical bank" external to the Vatican.

"Total transparency would assure the faithful, who are continuing to offer generously, that the money they give to the church, after the part used to guarantee the good running of the church itself, would be destined primarily for the world's poor," the highly influential magazine said.

John Allen, author of several books on the Vatican and correspondent for the National Catholic Reporter, said there was talk among cardinals at the pre-conclave meetings "that the Vatican does not need its own bank, and getting rid of it would eliminate a perennial source of speculation and conspiracy theories."

Much of the estimated $7 billion managed by the bank, which was set up in 1942, belongs not to the Vatican but to religious orders and dioceses, who use it to transfer funds around the world.

Another option would be to scale the IOR down to manage only funds needed to keep the Vatican running, drastically reducing the number of outside accounts and making it less vulnerable to possible abuse.

"We could just say to the Jesuits, the Dominicans, the Franciscans: 'Sirs, you will have to take your business elsewhere.' " the senior prelate said.

However, part of the bank's profits have helped the Holy See balance its budget in the past, making up for deficits running into tens of millions of dollars. That means that if the IOR were to be phased out or closed, other sources of income would have to be found, the senior prelate said.

The church would probably be careful, however, before relinquishing too much financial autonomy to outsiders so as to maintain its flexibility in emergency situations.For example, before the fall of the Berlin Wall in 1989, the bank was able to move money to countries in the former Soviet bloc to keep Catholic churches there alive in the face of repression.