What's really going on at the Vatican Bank?

The Vatican Bank is currently under investigation due to suspected money-laundering activities. And this is not the first time the bank has faced controversy. So what has happened, and how is the Vatican dealing with it? Simon Wilson reports.

The Vatican Bank is currently under investigation due to suspected money-laundering activities. And this is not the first time the bank has faced controversy. Simon Wilson reports.

What has happened?

Magistrates in Rome have opened a formal investigation into the Vatican Bank (known as the IOR see below) and its top-two officials on suspicion of money-laundering. They have also seized $30m of the bank's money. They acted after being alerted to two suspicious transfers on 6 September from an account held by the bank at a Rome branch of Credito Artigiano. One of the transfers was $26m sent to a Frankfurt branch of JP Morgan according to the Vatican this was to buy German bonds the rest to a Rome branch of Banca del Fucino. But according to judicial sources cited by Corriere della Serra, the Vatican's account had already been frozen in April after it failed to provide adequate documentation for three transfers totalling $97m.

How has the Vatican reacted?

Swiftly and aggressively. The Vatican is clearly aggrieved that what it sees as an administrative oversight has drawn worldwide publicity at a difficult time for the Roman Catholic church. The bank's chairman Ettore Gotti Tedeschi, a widely respected expert in financial ethics brought in by the Vatican to clean up the IOR, is openly furious that he himself is now under suspicion. Last week the Vatican printed a front page editorial in its newspaper, L'Osservatore Romano and took the unusual step of writing to the Financial Times to say that Italian officials have grossly overreacted to a technicality. Either way, the affair signals a shift in behaviour by both the Vatican and the Italian state.

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In what way?

Although the Vatican is (controversially) a sovereign city state, this is the first time the Bank of Italy has treated the IOR just like any other 'foreign' bank within its jurisdiction. In effect, it is simply enforcing to the letter of the law 2007 EU money-laundering laws sending a warning shot across the Vatican's bows that the days of special treatment are numbered. The Vatican's response signals its determination to end the IOR's reputation for murky dealings and make it onto the OECD's 'white list' of countries with good financial transparency.

What murky dealings?

The most famous of the scandals the IOR has been involved in was the death of 'God's Banker' Roberto Calvi, discovered hanging from scaffolding under Blackfriars Bridge in London in June 1982. His death was at first treated as a suicide by police, then a murder. But the case has never been solved.

What's this got to do with the IOR?

Calvi was the president of the Banco Ambrosiano of Milan, the largest private banking group in Italy, in which the IOR was the major shareholder. In the wake of Calvi's death, the $3.5bn bank collapsed, accused of laundering money for the Sicilian mafia. In particular, it emerged that Michele Sindona, a Vatican financial advisor since 1968, had been using the bank to launder the drugs money of the Gambino crime family. The Vatican insisted it had been duped by Calvi, and had no idea it could be construed as the biggest shareholder in the bank. But it nevertheless paid out $224m in recognition of its "moral involvement".

Was it involved, then?

Yes. It turned out Banco Ambrosiano had disguised its huge debts through a network of shell companies centred on a subsidiary in Lima, Peru. But all of them, as was made clear in letters of patronage issued by the IOR, were "directly or indirectly controlled" by the Vatican Bank. Archbishop Paul Marcinkus, head of the IOR from 1971 to 1989, was charged as an accessory in connection with the bankruptcy. According to Rupert Cornwell, the author of a book on Roberto Calvi, Marcinkus was notoriously agressive a "cigar-chomping" Lithuanian-American archbishop and former bodyguard to Pope Paul VI, whose most famous dictum was "You can't run the Church on Hail Marys". However, Marcinkus was never brought to trial. The Italian courts ruled that the cleric, as a high-ranking Vatican prelate, had diplomatic immunity. He continued to protest his innocence until his death four years ago in Arizona.

What about fascists?

Just as Pope Pius himself was accused of helping the Nazis, the IOR has repeatedly been accused of funding various fascist and right-wing movements around the world. In particular, the Vatican had close relations with the Nazi collaborators who governed Croatia during the Second World War, and has been accused of helping them steal the assets of Holocaust victims. However, a class action brought by survivors' groups in the US in 1999 was dismissed once again on the grounds of diplomatic immunity for the Holy See. More happily, the Vatican has often been cited as helping to fund the Polish Solidarity movement which helped to end communism in eastern Europe. It remains to be seen whether the current investigation will further blacken the Vatican's name or mark a significant step forward in its struggle to restore its reputation.

What is the IOR?

Established by Pope Pius XII in 1942, the Instituo per le Opera di Religione (Institute for Works of Religion IOR) is a bank unlike any other in the world. Its cash machines in the Vatican City have the unique distinction of allowing customers to conduct their business in Latin. The bank manages the Vatican's finances, as well as the accounts of Catholic organisations and religious orders, and the pensions of the city-state's thousands of staff. It has no shareholders, is not open to the public, and is not allowed to make a profit; all surplus monies are in theory devoted to religious and charitable purposes.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.