Managing Mammon

The Economist
July 12, 2014

http://www.economist.com/news/finance-and-economics/21606897-shake-up-catholic-finances-managing-mammon

AS HE unveiled an extensive shake-up of the Vatican’s financial structures on July 9th, Cardinal George Pell said Pope Francis would soon name an auditor-general, free to “go everywhere and anywhere” in the walled city-state to root out pecuniary lapses. The appointment of the new official would help the Vatican work towards “transcendency”, the cardinal added, before correcting himself to say “transparency”.

Religion and finance have always sat together uncomfortably, nowhere more so than in the Catholic church. The Vatican City is a natural tax haven. Its Institute for the Works of Religion (IOR)—better known as the Vatican bank—has been wreathed in mystery and tainted by scandal since its involvement in the collapse in 1982 of Banco Ambrosiano (the bank’s chairman, Roberto Calvi, was found hanged under Blackfriars Bridge in London).

But as a result of reforms initiated by Pope Benedict XVI and pursued vigorously by Francis, the outlines are emerging of a more transparent, rational system. Cardinal Pell, a no-nonsense Australian appointed in February to head a new secretariat for the economy, announced two main changes.

The first concerns the Administration of the Patrimony of the Holy See (APSA). Less well-known than the IOR, APSA generates most of the cash to pay for the Vatican’s administration. It has two sections. One oversees the property left to the Vatican after the occupation and eradication of the Papal State during Italy’s unification in the 19th century. The other section invests the papal “nest-egg”: the cash Italy’s fascist dictator, Benito Mussolini, gave the papacy in 1929 to compensate it for the loss of its territories. The first section is to be hived off into Cardinal Pell’s “finance ministry”; the second will become, in effect, the Vatican’s central bank.

The big change at the IOR is that it has a new board and a new president—the third in 26 months (for nine of which the post was vacant). Out goes Ernst von Freyberg, a German financier, who was appointed in February 2013. In comes Jean-Baptiste de Franssu, a French former chief executive of Invesco Europe, a fund-management group. Both did their best to depict this as normal and each paid tribute to the other. Mr von Freyberg had presided over a first phase that included vetting all the IOR’s 18,000-odd customers and their accounts. Around 3,350 customer relationships either have been stopped or are being ended; most of these were dormant accounts but some 750 were customers the Vatican did not want.

Now it was time for phase two, in which the IOR would need a full-time president. And Mr von Freyberg did not want to spend all his time in Rome. Vatican sources said, however, that his clean-up had upset many clerics and Italian media reported a clash between the German financier and Monsignor Battista Ricca, the prelate—the IOR official who acts as Pope Francis’s eyes and ears in the institution.

The pictures got small

A summary of the bank’s results for 2013 revealed the financial cost of Mr von Freyberg’s programme. Net profit was down from ˆ86.6m ($118m) in 2012 to ˆ2.9m. That was partly because of a fall in the value of the IOR’s gold reserves. But much of the damage was done by extraordinary charges, including ˆ15.1m to cover losses on a loan reportedly sponsored by Pope Benedict’s right-hand man, Cardinal Tarcisio Bertone, to a company that makes films with religious themes.

In future, the IOR’s investment activities are to go to a new body, Vatican Asset Management (VAM), leaving the institute free to concentrate on transferring funds to dioceses, religious orders, missionary outposts and the like around the world. Mr de Franssu said that VAM would invest according to Catholic ethical principles. But someone will need to make sure it does not drift back into the troubled waters that the IOR is leaving behind.