Catholic Church Fears Growing Vatican Bank Scandal

By Andreas Wassermann and Peter Wensierski
Spiegel
July 2, 2012

http://www.spiegel.de/international/europe/a-growing-vatican-bank-scandal-threatens-catholic-church-image-a-842140.html

A new scandal threatens to engulf the Catholic Church and this time the focus is money. Senior Vatican officials are battling over the future of the Vatican bank. While some would like total transparency, dubious transactions from the past and present could harm the Church's image.

The Vatican scandal over shady bank accounts and millions in suspect transfers began shortly before sunrise on June 5 on Via Giuseppe Verdi, a picturesque street in the old part of Piacenza, a town in northeastern Italy. An elderly gentleman in a tailor-made suit had just left his house with a leather briefcase dangling from his right hand. He was on his way to his car.

It was to be an important day for Ettore Gotti Tedeschi, who had recently been fired as the head of the Vatican bank -- even if it turned out differently than he'd expected. Tedeschi was planning to go to the Vatican on that morning, but he never got there. The 67-year-old banker missed the high-speed train to Rome, meaning he couldn't, as he had planned, get into a taxi at the Italian capital's central station for the short journey across the Tiber River to the Vatican. There, he had hoped to take the documents out of his briefcase and hand them over to a confidant of the pope.

Instead, Gotti Tedeschi found four men waiting for him in the street -- not a hit squad as he feared at first, but investigators with the Carabinieri, Italy's national military police force. Even before he reached his car, they presented him with a search warrant and escorted him back to his house. For several hours, they searched through his sparsely furnished, cloister-like home office. At the same time, other officers were searching through Gotti Tedeschi's office in Milan. Among the objects they confiscated were two computers, two cabinets' full of binders, a planner and his briefcase.

The investigators were pleased. While they made but little headway in their corruption investigation involving a client of a company Gotti Tedeschi had once headed, an Italian subsidiary of the Spanish banking giant Santander, they stumbled upon something else in there search which proved to be spectacular.

The documents confiscated from Gotti Tadeschi, a former confidant of the pope, provided Italian law-enforcement officials insight into the innermost workings of the Vatican bank. The secret dossier includes references to anonymous numbered accounts and questionable transactions as well as written and electronic communications reportedly showing how Church banking officials circumvented European regulations aimed at combating money-laundering.

A Possible Motive

The drama unfolding in the Vatican is now heading toward a climax. First, it was "il corvo," the raven, whose revelations about life in the court of the embattled and exhausted Pope Benedict XVI caused months of unease. Then came the arrest of Paolo Gabriele, the pope's butler, whom the Vatican has fingered as the source of the private papal correspondence that was leaked to the public. And now the scandal surrounding Gotti Tedeschi is providing a possible motive for the Catholic soap opera: money.

The pope had apparently tasked the financial executive with making the Vatican bank more transparent. But by approaching his task with perhaps an excess of zeal Gotti Tedeschi upset powerful forces within the Roman Curia, the Vatican's administrative and judicial apparatus. Several high-ranking officials within the Curia viewed the bank, officially known as the Institute for Works of Religion (IOR), as something akin to a trust company for clandestine monetary transactions that is not only used by the Church, but allegedly also by the mafia as well as corrupt politicians and companies. In one of the seized Gotti Tedeschi memos, he wrote: "I've seen things in the Vatican that scare me."

It is a clear turning, one which transforms the so-called "Vatileaks" affair into a financial scandal that could seriously damage the reputation of the Holy See. Internal correspondence dated May 22 from a member of the bank's supervisory board to the Vatican's Secretariat of State notes that the Vatican bank is presently "in an extremely fragile and precarious position" and that the situation had reached "a point of imminent danger."

The next act in the drama is set for Wednesday. Money-laundering experts from the Council of Europe will present a preliminary report on the Vatican in Strasbourg. It currently looks as though they will indicate serious misgivings about whether the IOR has taking sufficient precautions against money-laundering.

Their worries are corroborated by the work of Italian authorities. In questioning sessions sometimes lasting several hours, Gotti Tedeschi told public prosecutors whom he trusted in the Vatican, other than Pope Benedict XVI, and whom he didn't. The banker reportedly fingered Secretary of State Tarcisio Bertone as the ringleader of his "enemies," accusing him of doing everything possible to keep the Curia's accounts hidden from Italian authorities. The Vatican has been trying to make its bank eligible for inclusion on the Organization for Economic Cooperation and Development's so-called "white list" of financial institutions not suspected of being involved in money-laundering or terrorism financing. But Gotti Tedeschi reportedly complained that: "If we continue with Bertone's line, we'll never get off the black list."

Alarmed Vatican Leadership

Fabio Palazzo, Gotti Tedeschi's Milan-based lawyer, has declined to discuss details of the interrogations and the content of the documents seized from his client. Nevertheless, he stresses that the documents contain "useful facts" that would indicate that there were no legitimate grounds for sacking Gotti Tedeschi as head of the bank.

The Vatican leadership is alarmed. Archbishops and cardinals are far from thrilled that Italian officials are now rummaging around in their secret affairs. Papal spokesman Federico Lombardi has openly threatened Italy's law-enforcement apparatus and urged it to kindly respect "the sovereign rights of the Holy See." In other words, he believes that all those documents including confidential details about the Vatican bank that were seized during the search of Gotti Tedeschi's home should not be in the hands of Italian investigators.

The fears of the pope and the Curia are well-founded. In the past, every time Italian prosecutors have stepped in and confidential documents have found their way to light, the secretive ways of the Vatican bank have always ended up damaging the Church's prestige. For more than 40 years, the IOR, founded in 1942, has been regularly embroiled in scandals, including bribery money for political parties, mafia money-laundering and, repeatedly, anonymous accounts.

Many who have become ensnarled in illegal business dealings with the Vatican bank have been forced to pay with their lives, while others have spent years behind bars. Despite all of its sacred and solemn promises, the Vatican has succeeded in keeping the pope's bank a haven for money-launderers. And instead of being on some Caribbean island, this one is right in the middle of Europe, in the heart of Rome.

Its business model depends on keeping things as shrouded as possible from all financial authorities. Capital gains are untaxed, financial statements are not disclosed and anonymity is guaranteed. The bank's exotic status of belonging to a religious monarchy in a sovereign state the size of a city park has shielded it from investigations and unpleasant external monitoring.

The bank's headquarters are housed in a medieval defensive tower known as Niccolo V nestled right against the Apostolic Palace, the pope's official residence, and is home to a vast amount of money and commercial papers. Here, roughly 100 employees look after 33,000 accounts with total deposits of some ˆ6 billion ($7.6 billion). The direct beneficiary is the pope and his Church; 2010 earnings from the bank were ˆ55 million. Such revenues help make up for a decline in donations from members of his global congregation.

Part 2: The Shady Past of the Vatican Bank

Whereas Benedict XVI and his predecessors have preached humility and ethical financial dealings from the window overlooking St. Peter's Square, his confidants working directly beneath the papal windows have continued to pursue shady financial transactions.

The Vatican has yet to divulge the business practices its bank has been using for decades. "There is fear that, owing to the transparency necessary today, one will find something in the past that one doesn't want to," says Marco Politi, a Rome-based Vatican expert.

Such things could include a complex system of ghost accounts and shell companies like the bank had when Archbishop Paul Casimir Marcinkus was its head in the 1980s. At the time, the bank did business involving foreign currency and weapons with the Milanese banker Robert Calvi and the mafia financier Michele Sidona -- and helped launder illegal proceeds the mafia earned from drug-trafficking as well as bribes paid to Christian-conservative Italian politicians.

In the end, Calvi was found dangling beneath London's Blackfriars Bridge and his private secretary fell to her death from the window of his Banco Ambrosiano. Four years later, in 1986, Sidona would die in prison after drinking a morning espresso laced with cyanide.

Under Monsignor Angelo Caloia, Marcinkus' successor as head of the bank, the Vatican consistently expanded its money-laundering activities. While he was in charge, there were secret accounts such as that for Giulio Andreotti, the controversial former Italian prime minister. On an almost weekly basis, Caloia would bring suitcases into the Vatican full of donations from Italian companies in the form of cash and securities. There, the origin of the money would be obscured using accounts such as the one with the number 001-3-14772-C owned by the nonexistent "Cardinal Spellman Foundation." Likewise, relief organizations were founded with nice-sounding names masking the identity of their true beneficiaries.

It wasn't until about three years ago, when evidence of such dealings came to light, that Pope Benedict XVI ousted Caloia. What prompted his change of heart were the more than 4,000 documents that Vatican financial expert Renato Dardozzi had assembled and hidden before his death in 2003. In his will, Dardozzi had written: "These documents should be published so that everyone can learn what has happened here."

Eliminating the Traces

It became Gotti Tedeschi's job to clean things up. As a married layman who didn't belong to the clique of curial cardinals, he was well-qualified for the task.

Still, as a Catholic bound by a sense of loyalty to the pope, Gotti Tedeschi found the new job challenging. Owing to the shady dealings in the past, the IOR enjoyed a reputation in the global financial word as being about as transparent as offshore banks in Caribbean tax havens. Gotti Tedeschi wanted to change this and make the Vatican eligible to be included on the OECD's "white list" of global organizations not suspected of money-laundering. Officials from the Council of Europe committee responsible for combating money-laundering were supposed to assist these efforts and, to do so, even be allowed into the inner sanctum of the Vatican bank.

Yet veteran Church bankers and members of the Curia apparently had no intention of abstaining from lucrative dealings with problematic funds. The plan, Italian financial investigators believe, was from then on to discretely eliminate all traces of clandestine business dealings.

A role in the effort was played by a bank in Benedict's home country: Germany. In 2009, the same year that Gotti Tedeschi took over as president of the IOR, the bank set up an account with the Milan-based branch of the American bank JPMorgan Chase. From that point on, millions started flowing on an almost daily basis from JPMorgan's Milan office to the one in Frankfurt, where the IOR also had a JPMorgan account.

Vatican officials opted for a special account in Milan with the number 1365, a so-called "sweep facility account," which was automatically zeroed out at the end of each day. The Vatican bank confirmed the existence of this account late last week, though it said it was primarily used for handling securities transactions.

Through last year, this financial set-up was allegedly used to process more than a billion euros for the Vatican bank. Italian investigators suspect that it was also used to launder funds from dubious sources.

The transfers via JP Morgan would likely have remained unnoticed if the IOR hadn't involved another Italian bank two years earlier in two cases. The attention of Italian financial regulators had been attracted by curious transactions the Vatican bank had made via Credito Artigiano. In 2010, a total of ˆ23 million had been transferred from several accounts at that bank, but without listing the account holders or purposes of the transfers. Of that, ˆ20 million was reportedly supposed to make its way to the Vatican's JPMorgan account in Frankfurt, while the remaining ˆ3 million was destined for an account at another bank in Rome.

Distressing Financial Storm

Before the transactions could be completed, federal prosecutors in Rome had the funds frozen. Then they launched investigations against Gotti Tedeschi and Paolo Cipriani, the IOR's general director, on suspicion of having violated anti-money-laundering regulations. Alarmed by the Italian investigations, JPMorgan executives started asking Vatican officials where the money that had been regularly flowing through the Milan account was actually coming from. But they didn't get any satisfactory answers. As a result, the bank then gave the IOR an internal classification as a high-risk client and started monitoring its transactions for clues that might point to money-laundering.

The probes of the prosecutors in Rome and the distrust of the bankers in Frankfurt forced the Vatican to act -- more, one is tempted to believe, out of panic than regret. At the end of 2010, Benedict issued a decree obliging the Vatican bank to abide by EU anti-money-laundering norms. He also established a supervisory authority for the Vatican, the Financial Information Authority, and named as its head Cardinal Attilio Nicora, who had served as the papal asset manager for many years.

With these emergency measures, the Vatican succeeded in getting Italian officials to release the ˆ23 million in frozen IOR funds. But the calm it had hoped they would bring to the distressing financial storm did not materialize.

Indeed, fresh aggravation threatens to come from several quarters soon. On the one hand, there are the money-laundering experts of the Strasbourg-based Council of Europe who the Vatican had to allow in to evaluate its bank. This week's vote by these experts will influence whether the Vatican will one day number among the states on the EU's "white list." The experts from the Council's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) already set up camp in the Vatican for several days in 2011. There, they questioned cardinals, bishops and IOR executives on 16 points. They will only give the pope's bank a clean bill of health if all of those points are answered positively.

On top of that, federal prosecutors in Rome are moving forward with their investigations. Last October, they asked their German counterparts for assistance in obtaining documents related to the IOR account at the JPMorgan branch in Frankfurt. The move failed in November, however, when a judge in Frankfurt refused to issue a seizure order due to a "lack of evidence."

'Remaining a Tax Haven'

The pope's bankers faced another bitter setback early this year when JPMorgen closed the IOR's transfer account in Milan. In explaining its decision, the American bank wrote to Rome in mid-February that strict anti-money-laundering regulations no longer permit "additional deposits or withdrawals via account No. 1365."

Meanwhile, the situation back at IOR headquarters was becoming increasingly unchristian. While Gotti Tedeschi lost support from above, Cardinal Secretary of State Bertone took care to see that Benedict's decree was watered down. In the new version, it says that monitoring of the Vatican bank is only permissible with the consent of Bertone himself. Cardinal Nicora, the man originally assigned to become the Vatican's new financial watchdog, was not pleased. In a letter to Bertone written soon after the change, Nicora complained that, with it, "we are taking a step back and remaining a tax haven."

A confidential memo leaked to the Roman daily Il Fatto Quotidiano makes clear just how dramatic and divisive things have gotten in the Vatican's top echelon. Although the document is undated and bears no indication of who wrote it, the newspaper claims it comes from "the very top," perhaps among those close to Georg Ganswein, the pope's private secretary and extremely close confidant. In the document, the anonymous author describes the Vatican bank's current business practices as "inconsistent with the transparency requirements." It then goes on to say that there is a "concrete risk of a rating downgrade and, thereby, of a significant loss in the prestige of the Holy See."

The new panel charged with supervising the Vatican bank began operations in May. In impassioned letters to Cardinal Secretary of State Bertone, two of its members -- the former banker Ronaldo Schmitz, a German, and his American colleague Carl Anderson -- expressed their lack of faith in Gotti Tedeschi. In his letter, Anderson specifically eluded to the closure of the JPMorgen account. Given the "difficult times," Anderson wrote, Gotti Tedeschi had failed to "vigorously defend the institution." Schmitz, on the other hand, lamented Gotti Tedeschi's "wanting loyalty."

Two days later, Gotti Tedeschi was forced to abandon his uncomfortable position.

In order to establish at least a bit of transparency, papal spokesman Lombardi last Thursday did something that had never before been done in the history of the IOR: He invited journalists to a meeting within the fortress tower housing the bank so as to counter the claim that there were anonymous numbered accounts.

In the bank's ornate salon, it quickly became clear how seriously God's bankers are taking things. Questions? Yes, though preferably in written form. Cameras? No. Recording devices? Forbidden. A glimpse into the vault? Of course not. Still, things weren't completely serious: Bank director Cipriani jokingly displayed a T-shirt bearing the words: "Anti-Moneylaundering Expert."