The Pope's Overlooked Legacy: Reforming The Vatican Bank

Pope Francis has worked to reform the "most secret bank in the world."

Pope Francis inherited a Roman Catholic Church in a unique type of crisis, an institution that was widely perceived as out of touch with modernity and unable to live up to its own eternal values. But he was also burdened with a very different kind of problem: managing a financial institution immersed in money laundering and tax evasion charges and reluctant to change.

Francis has been widely recognized for his efforts to move the church into the modern era, but his work on financial reforms at the Vatican bank, once called the "most secret bank in the world," hasn't gotten as much attention.

The Vatican bank's shadowy dealings have been well documented over the years, particularly the 1982 death of Roberto Calvi. Calvi, known as "God's Banker," was found hanging from Blackfriars Bridge in London, his pockets stuffed full of bricks and more than 10,000 British pounds in cash. Two weeks later, the bank where Calvi served as chairman and in which the Catholic Church was the largest shareholder, Banco Ambrosiano, collapsed. The bank was suspected of laundering money from Mafia drug trafficking. The Vatican, the Italian government said at the time, was the bank's "effective partner." The Church admitted "moral involvement" in the collapse and paid creditors $241 million.

The Vatican's financial troubles became very public again in September 2010, when Italian authorities seized a 23 million euro transfer out of the Vatican bank. An Italian bank rejected the Vatican bank's request to move the money because the Vatican bank would not provide basic information -- the reason for the transaction, and the identity of the sender and recipient -- that are required by financial regulators in order to detect money laundering and other illicit activities. The lack of transparency ended up triggering a minor banking crisis, prompting other European and international banks to refuse to do business with the Vatican bank.

The situation forced then-Pope Benedict to act, but he did not remain in power long enough to complete deep reform. Much of the reform work was left to Francis, who became pope in 2013.

“He essentially has no choice” but to reform the bank, says Gerald Posner, author of God’s Bankers, a financial history of the Vatican published earlier this year. “Any pope would have to be doing this," he added, "but the reason I give Francis extra credit is he is doing it with some vigor and enthusiasm." Posner also credits Francis with bringing in third parties from outside the church to help reshape its financial policies.

Francis got his own call to action shortly after assuming the papacy, when Monsignor Nunzio Scarano, a senior Vatican cleric who was referred to as "Monsignor 500" for his favored denomination of euro bills, was arrested in June 2013 while trying to bring 20 million euros from a Swiss bank account into Italy.

Francis’ response, Bloomberg Businessweek wrote in May, was to call on six high-profile lay Catholics from the financial world to help devise a plan to increase financial transparency in the Vatican. Their recommendations lead to a wholesale reorganization of what is essentially the Catholic Church’s corporate governance structure, including oversight of the bank, in 2014. The pope has also brought in the consulting firms KPMG and McKinsey to assess and rework the Vatican’s financial accounting systems more broadly, as well as Ernst & Young and Promontory Financial Group to focus on modernizing and reforming the accounting and administration procedures at the bank itself.

International pressure to change the bank's policies really began in 2002, Posner notes, when Italy adopted the euro and the Vatican followed suit. “The Church didn’t know it then, but that put them subject to Brussels and E.U. oversight” on banking issues, Posner said.

In December 2010, the Vatican issued rules making it compliant with European Union financial regulations. But even after that, progress was slow-going. The Vatican didn't instate any rules against money laundering or the financing of terrorism until 2011. It had no limit to the amount of money that could cross its border with Italy until 2012, a massive oversight given the singular nature of that border: it is a series of streets in the dense heart of Rome, without uniform security checkpoints. The bank did not disclose its annual earnings until 2013.

When the European Union began to pressure the Vatican to adopt standard internal controls, major international banks, keen to stay in the good graces of the continent’s financial regulators, also pushed for change. Banks including Deutsche Bank, JPMorgan and UniCredit pushed for reform to be wholeheartedly implemented, the Financial Times reported in 2013 -- if only because until such reforms, any dealings they had with the Vatican bank would be considered suspect.

Even three years after it committed to those modern banking reforms, the Vatican bank still “operated unlike any other bank they had encountered,” the FT reported:

There were surprisingly few checks and balances on cash flow -- and far less documentation than expected. The staff was small -- 112 people, largely Italian until this year, with cardinals acting as supervisors. Many of the staff seemed unversed in customer due diligence, according to some. “They would not answer basic [Know Your Client] requests,” a senior manager at an international bank says.

Basic money laundering and tax evasion rules would likely have precluded the Vatican bank from granting accounts to the Iraqi, Iranian and Indonesian embassies. Those accounts, along with all embassy accounts, were finally closed in 2013. Powerful Italian figures also made illicit use of the bank. Seven-time prime minister Giulio Andreotti, arguably the most powerful post-war politician in the country, had an account at the bank that was the conduit for $60 million in slush funds, it was revealed after his death in 2013.

As of 2013, a quarter of the Vatican's transactions were still being done in cash -- startling for a bank with 5 billion euros in assets. For an institution that collects massive amounts of small donations, that is understandable, but for a bank that is trying to root out pervasive money laundering, it is untenable.

As part of his banking reforms, Pope Benedict created a new regulatory body within the Vatican bank and brought in Swiss lawyer Rene Bruelhart, a well-respected anti-money laundering expert, to run the agency. By 2014, Bruelhart had managed to elevate the status of the internal watchdog and infuriate its board, Rome newspaper Il Messaggero reported. The board accused Bruelhart of operating the agency without informing them of his activities -- but the tensions could likely be explained the board's heavily Italian makeup and its lack of progress prior to Bruelhardt's arrival.

The arrival of Pope Francis has made his job far easier, Bruelhart says. “[The job] has changed tremendous­ly, I really find open doors,” he told the FT in August. Under Francis, supervision of the bank is “less about networks -- or Italian networks -- and more about expertise.”

That sort of unquantifiable but real change may be Francis' most important contribution to financial reform in the Vatican. Others can sort out the mundane details of account supervision and providing proper details for wire transfers. What the pope can provide is the institutional authority for outside experts to bend a closed bureaucracy towards the standard practices of modern banking.

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