[Update 28 June: A senior official working in Vatican finance and two others have been arrested by Italian police following suspicions of money-laundering (details here). Mgr Nuncio Scarano, a senior accountant in the Administration of the Patrimony of the Holy See, was arrested in Sicily following an investigation into suspicious transactions. Mgr Scarano has been suspended while the investigation proceeds. The Vatican today promised full collaboration. Whether or not the transactions were legitimate, observers say they highlight the need for reform. According to the Associated Press, “the case of Monsignor Nunzio Scarano is just one example of how lax norms and incompetence, if not more serious shortcomings at the Institute for Religious Works, or IOR, have sullied the Vatican’s reputation in international financial circles”.]

The Vatican announced Wednesday that Pope Francis has named a commission of mostly non-Italians to investigate and report on the Institute for the Works of Religion (IOR), known colloquially as the ‘Vatican bank’. The decision to appoint the commission, said the Secretariat of State communiqué, “arises from the wish of the Holy Father to understand better the juridical position and activities of the Institute in order to ensure that it better conforms to the mission of the universal Church and the Apostolic See.”

The move was announced with the release of  signed decree, or chirograph, an instrument of canon law which gives the commission full legal powers to interview personnel and collect documents. But while it will be given full access to do its work, the job of the commission of five — which includes two Americans (one of whom is a laywoman), two cardinals and a Spanish bishop — is not to recommend technical reforms, which are well underway.  Its task is rather to advise Pope Francis on whether the bank in its current form helps or hinders his mission. In the words of the chirograph, it is to help ensure that “the principles of the Gospel also permeate activities of an economic and financial nature”.

According to Fr Federico Lombardi, Vatican spokesman, the IOR “will continue to function according to its current statutes.”  The commission, he said, will help the Pope decide if reforms are necessary and whether they are “reforms in the way the bank operates or reforms of other kinds.”

That might, conceivably, mean an eventual decision to close the bank — although this is unlikely. But the commission could well call for an overhaul of its methods and modus operandi.

The IOR’s path to reform

Most of the nearly $7 billion managed by the IOR doesn’t belong to the Vatican itself, but to religious orders, dioceses and Catholic organisations across the world whose use it as a means of holding funds and move them to where they’re needed. The IOR employs 112 people, has 19,000 customers, and is highly capitalised, with an equity of roughly 800m euros on a balance sheet of 5bn euros.

It doesn’t not lend money, or make direct investments, and therefore is more of a fund than a bank; nor does it speculate in currency or commodities. It receives money as deposits from religious orders and Vatican employees, and invests it in government and corporate bonds and in other banks, receiving a slightly higher interest rate than it gives to its customers. The profits made from its investments — around 55m euros — are used  to fund humanitarian projects identified by the Vatican’s charitable body, Cor Unum.

But its privacy and independence  — it was established during World War II by Pope Pius XII as an offshore institution located inside Vatican City, operating  outside EU rules; it has no shareholders; and is run by a professional CEO who reports directly to a committee of five cardinals, and ultimately to the Pope — have led to accusations that it is vulnerable to being used unwittingly to launder criminal or terrorist money. 

In 2010, accusations that the bank had been used to recycle mafia money led to Roman magistrates freezing $33 million which the IoR held in an Italian bank, claiming violations of transparency protocols. The Vatican denied the charges, and the money was released. Whether or not there was any substance to the charges, it highlighted the need for the IOR to adopt protocols similar to those of modern western banks.

Transparency and accountability

In response to the 2010 scandal, Pope Benedict XVI  began a series of reforms to bring the IOR into line with European best practice.  Its head, Ettore Gotti Tedeschi, was removed, and a review carried out to ensure that there were no inappropriate account holders and that the movement of assets had a clear paper trail.

In 2012 Pope Benedict XVI issued a decree allowing outside auditors to examine the Vatican’s financial books, and created a Vatican watchdog, the Financial Intelligence Authority, to oversee the IOR’s financial activities. He also brought in a Swiss lawyer, René Brülhart, with an outstanding record of cleaning up European banks. (Earlier this year, Brülhart travelled to the US to sign an agreement with the U.S. Financial Crimes Enforcement Network (FinCEN), a unit within the U.S. Treasury Department that tracks suspicious money flows. The Vatican said the new agreement was meant to “foster bi-lateral cooperation in the exchange of financial information”, sharing with FinCEN information about suspicious transactions that could relate to money laundering or the financing of terrorism.)

Last year the Vatican signed an agreement with Moneyval, the Council of Europe’s anti-money laundering agency, to ensure full compliance with international standards. Moneyval auditors were able to examine records of judicial and diplomatic cooperation, anti-money-laundering certifications, accountancy management letters, foundation registry records, and a host of other confidential legal documents — the first time that the Vatican has allowed such independent external scrutiny of its financial affairs.

Moneyval applauded the Vatican for “coming a long way in a short time” toward greater financial transparency, said it had met 9 of its 16 recommendations but said greater external oversight of the bank was needed. The IOR agreed to put right the deficiencies, and a new audit was scheduled which will begin next month to assess whether it has done so.

In February, shortly before he resigned, Pope Benedict  appointed a German layman with long experience of financial matters and the regulatory process, Ernst von Freyberg, as IOR’s president, to continue the reforms, and to make the IOR more transparent and accountable, and to communicate better. Among his first announcements, for example, was that the IOR would publish its results online.

In an interview he gave at the end of May, von Freyberg stressed the uniqueness of the IOR’s role:

What is really unique is that we really understand the world of the Church and the mission of the Church. There are 112 people in the IOR who have 19,000 customers. By far the largest amount of them are nuns or clergy and very often they know the person who deals with them at the IOR for 20 or 30 years. We know exactly what they need, they have a trusted person here and it is this personal relationship which makes them come here. We are in competition like any other financial institution around the world. Every single one of our clients is constantly solicited by banks to go to them. They stay with us because the want to stay with us.

You know, if we ask the question ‘should we close the IOR’, our clients have voted 99.99 % against it. They want to stay here, they want to put there money here. They have personal service and experience also shows that it is very safe … During the financial crisis we were never in trouble. No government had to bail us out; we are very, very safe.

On the Moneyval process, he noted:

The purpose of the Moneyval process is to identify countries and jurisdictions that might cause a risk to the global financial system. This is done by carrying out assessments of the legal framework of each country and jurisdiction. Countries and jurisdictions that are called critical are listed. The Holy See has been evaluated last year and according to the Moneyval report published last year, the Holy See has a functional system in place and is NOT considered to be a critical jurisdiction.

Having said that we are one aspect of that system. We are in particular called to have stronger procedures and stronger structures in order to detect suspicious transactions and in order to detect suspicious customers. I have now taken the leading consultancy in the world for these questions to rewrite our manual how we detect transactions and suspicious customers and to review all our accounts. Structures and procedures will be ready by the end of the summer and then we will have fulfilled that part of the process.We will go beyond that and review every single deposit and that we will have done by the end of the year.

Pope Francis’ reform begins

On 15 June, Pope Francis appointed a trusted associate, Mgr Mario Salvatore Ricca, as “prelate” for the bank —  a post vacant since 2011. The prelate reports to the commission of cardinals that oversees the bank, attends board meetings and has privileged access to its famously secret financial activities. The job had been vacant since 2011.

The 57-year-old monsignor  is a member of the Holy See’s diplomatic corps and runs a number of church-owned residences, including the Domus Sancta Marthae, the Vatican guesthouse where Pope Francis has been living.

The Pope’s next move has been to appoint the commission of enquiry. According to Fr Lombardi, the  commission does not cast doubt on Freyberg’s statements or on his responsibilities at the bank under the current statutes. The commission members “will not be making technical checks on the (bank’s) operations. Freyberg is in charge of technical, operational matters and making sure they are done correctly,” he said.

Rather, “the pope is raising a broader question, which is the relationship between this institution — its reality, the way it functions — and the framework of the mission of the church and the Holy See. These are two distinct things.”

“The commission could end up saying the bank functions well,” he said, while still questioning whether it is “necessary for the governance of the church. These are two separate questions.”

The members of the Commission have been appointed not for their technical expertise but for their inside knowledge of the Vatican, their good judgement and track record, and because the Pope trusts them to grasp the ‘big picture’ — namely, how the Vatican needs to serve the Church’s universal mission.

• The American Mgr Peter Wells, the asesore, or No. 3 official in the Vatican’s Secretariat of State, provides the link to the heart of the Vatican operations, and is known for his strategic acuity and desire for reform.
• The other American is Professor Mary Ann Glendon, former U.S. ambassador to the Holy See and president of the Vatican’s Pontifical Academy of Social Sciences, greatly admired for her smart common sense and intellectual grasp. 
• The only Italian, Cardinal Raffaele Farina, former head of the Vatican Library and Vatican Secret Archives, has experience of running a large Vatican operation.
• Cardinal Jean-Louis Tauran, the Frenchman who announced the election of Pope Francis to the world, is another Vatican heavyweight: formerly the Holy See’s top diplomat, he is now president of the Pontifical Commission for Interreligious Dialogue.  And as a member of the body of cardinals that oversees the Vatican bank, he offers vital inside knowledge.
• Bishop Juan Ignacio Arrieta, who is Spanish, is secretary of the Pontifical Council for Legislative Texts, and thus brings the necessary juridical knowledge to bear on the task.

The significance of the announcement

Yesterday’s announcement is the first major sign of the way Pope Francis intends to carry out curial reform.

First, it shows that he wants to think again from first principles about how it should be brought about. Rather than starting with the technical issue of reform — in the case of the bank, the process is already underway, and has no desire to hinder it — he is asking the prior question: how does the bank’s existence and modus operandi fit the mission of the Vatican and therefore the universal Church?

Second, it can be seen as reflecting the message he has consistently given to Vatican officials since his election: that the Church is not an NGO, but the Body of Christ; and that they are there to serve the mission of the Church, rather than any other purpose. In this sense, the commission has a task similar to that of the Group of eight (now nine) cardinals he has appointed to oversee reform of governance. As the Vatican commentator Andrea Tornielli observes, “it is clear that the IOR will be re-thought and reformed. Because the financial and economic institutions of the Vatican must reflect the message of the Gospel and cannot be allowed to continue to give a contrary witness.”

Third, in order to achieve reform Pope Francis is willing to appoint heavyweights capable of such rethinking. Fr Tom Reese at NCR is wrong to dismiss this commission as “the traditional Vatican approach to dealing with a PR problem: appoint a committee, mostly clerics, who have no expertise in the topic under study and ask them to come back with a report.” The point about these nominees is that they are outside the IOR yet still Vatican heavyweights, who understand the Pope’s desire to conform the Curia to the Pope’s mission. Outsiders as Fr Reese conceives them — “accountants, bank board members, and government investigators and regulators” — would be incapable of this kind of “deep” reform; and as he himself points out, such experts have already been brought in as part of the Moneyval process.

Yesterday’s announcement – the nature of the commission appointed, and its brief — shows us very clearly the process of reform Pope Francis has begun, and how he intends to carry it out.