Pope is banking on new-look institution

Over the past few weeks, Italy has been back at the heart of events.

Centrist prime minister Enrico Letta survived a vote of confidence after the attempted overthrow of his government by his predecessor, but one Silvio Berlusconi was frustrated by a rebellion against him led by key lieutenants.

In early October, tragedy struck following the loss of a boat filled with hundreds of migrants near the island of Lampedusa, near the North African coast. And Pope Francis has appeared to tighten his grip on one of the Holy See’s most accident-prone institutions, the Vatican Bank.

Pope Francis has clearly signalled his intention to throw open the windows across the Vatican as he sets out to reform the bureaucracy he has inherited. One of the first signs that the pendulum is beginning to swing in the direction of transparency has been the publication, for the first time, of the accounts of the bank, known officially as the Institute of Religious Works.

The BBC quoted a Vatican insider as describing the release of the accounts as being like the end of the Berlin Wall, representing the first breach in the invisible financial barrier between the Vatican City and Italy.

It was revealed that net profits at the Institute of Religious Works rose from €20m to €86.6m “mainly due to favourable trading results and higher bond values.” The bank has almost 19,000 customers, equity of €770m, and €6.3bn in customer assets.

A hint of trouble ahead was provided by the bank’s president, Ernst von Freyberg, a German lawyer selected by Pope Benedict in the dying days of his pontificate to begin the task of cleaning out its stables.

This followed a downbeat assessment of the bank by a Council of Europe anti-money laundering committee known as the Moneyvale Committee. According to von Freyberg, “we expect 2013 to be marked by the extraordinary expenses from the ongoing reform and remediation process”.

It emerged that the Church was closing down all foreign diplomatic accounts at the bank, with the removal of 900 customers from the books.

The Times has reported that auditors have uncovered evidence of suspicious cash transactions by diplomats from Iraq, Iran, and Indonesia. Up to recently, Syria also had an account.

The pace of events at the bank has been dramatic. In June, a senior cleric at the bank was investigated for money laundering. This was soon followed by the resignation of bank director Paolo Cipriani and his deputy, Massimo Tulli.

By then, Pope Francis had set up a commission of experts to make recommendations on how to reform the bank. He appointed close friend Fr Battista Ricca as prelate of the institution. The commission includes two cardinals as well as a professor from Harvard, Mary Ann Glendon, who served as ambassador to the Holy See during the latter days of the presidency of George W Bush.

The bank was founded in 1942, with its origins dating back to the period following the disappearance in 1870 of the Papal States. It has had a chequered history, to say the least. In fact, since the 1960s, the institution has been plagued by scandal. Its links with the failed Banco Ambrosiano destroyed the reputation of a close associate of Pope John Paul II, Archbishop Paul Marcinkus, a burly figure who was constantly close to the Pope during his visit to Ireland in Oct 1979. Marcinkus chaired the Vatican bank between 1971 and 1989.

During his period in office, the bank took a 10% stake in Banco Ambrosiano which eventually collapsed, leaving debts equivalent to €1.5bn. The Institute of Religious Works entered into close business relationships with strange and rather sinister bedfellows including Roberto Calvi who ended up hanging from Blackfriars Bridge close to the City of London in 1982, having gone on the run from the Italian authorities, accused of laundering money for the Mafia.

Calvi was known as God’s banker.

It has been alleged by writers such as John Cornwell and Carl Bernstein that Calvi and the Vatican Bank were used for the purposes of funnelling money to the Polish trade union Solidarity at a time when it was standing up to the power of the Polish communist state and the Kremlin.

What is clear is that the bank by the 1980s was engulfed in scandal. At one point, Archbishop Marcinkus took refuge inside the Vatican City in an effort to evade service of court documents by the Italian authorities.

In 1968, the Italian government removed the Holy See’s tax exemption status on its Italian investments. The decision was made to diversify. A shady character called Michele Sindona was appointed financial adviser. (Sindona would eventually die at the hands of criminal rivals having swallowed a poison-filled cup of coffee while languishing in jail.) In 1974, Sindona’s own financial empire collapsed, leaving the bank £20m out of pocket.

Eight years later, Banco Ambrosiano collapsed. According to Vatican watcher John Allen, “much of the missing money at the bank was siphoned off via the Vatican Bank”. While the Institute of Religious Works denied legal responsibility, it acknowledged a “moral involvement” and paid over $224m in compensation to Banco Ambrosiano creditors.

The Irish Supreme Court would in 1991 give judgment in a case involving the bank, Tassan Din v Banco Ambrosiano. At the time, Mr Justice Murphy stated that “an order obtained by fraud is a mere nullity”.

Scandal has returned to the Vatican Bank. In July, the Italian tax police force arrested a high-ranking prelate, Monsignor Nunzio Scarano. It is alleged that he had been attempting to bring €20m in cash belonging to a wealthy ship-owning family from a Swiss bank to Rome in an effort to evade customs control. Scarano & is facing charges of engaging in embezzlement and money laundering.

The bank was already in the sights of Pope Francis, who is &attempting to shake up the running of the Vatican City. In interviews with a series of Jesuit publications, he called for a new, less bureaucratic Church, one focused on the poor than on material things.

Now in his late seventies, the Pope knows he may not have much time in which to make his mark. The bank scandal, however, provides the opportunity to establish a reform template.