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2007 04 01 * International News Service * Vatican state does non follow FAFT guidelines - but does it matter? * Keith Nuthall

WITH the accession of Cardinal Josef Ratzinger to the papal throne in 2005, some Vatican watchers have predicted a tightening of administrative procedures in the world's smallest sovereign state. The Vatican clearly has a global punch through the Roman Catholic Church, and this has raised concerns about the state's control of its banks amongst its detractors. Key amongst these is the Vatican Bank, (its formal name is the Istituto per le Opere di Religione (IOR) or Institute for Religious Works) which is not an independent central bank in the classic sense, but a public legal entity of the Vatican City State (VCS). It is authorised by international agreement to issue special Vatican Euro coins of up to Euro 1 million annually (with an extra Euro 300,000 on jubilees or years when a Pope dies), although it does not have authority to print its own Euro banknotes. This is according to a concord between Italy acting for the European Union (EU), and VCS, also representing the Holy See - the central core of the Roman Catholic Church - which has separate (and unpublished) accounts to the Vatican State, and which is legally distinct from this sovereign territory.

The bank does not have standard banking regulations, and has not formally adopted Financial Action Task Force (FATF) anti-money laundering and anti-terrorist finance procedures. Instead, it has been run according to traditionally handwritten laws issued by various popes called chirographs, through which the Pontiff expresses his legal will. The latest relevant chirograph, which provides the bank with its legal authority and internal governing regulations, was issued in 1990:
the Chirographum quo nova ordinatio datur Organismo Istituto per le Opere di Religione - reference 82 AAS 1619-20;
and the Adnexum Statuto, Istituto per le Opere di Religione - reference 82 AAS 1621-29. 

This says the bank has to "engage in activity of public benefit to the sovereign", which has generally been assumed to mean its primary purpose must be to assist the operations of Roman Catholic Church.

Indeed, under the statute account holders are supposed to be limited to Holy See members, religious orders, and persons who deposit money wholly or partly for pious works, such as managers and directors of certain Roman Catholic institutions, most based in Rome. Essentially it handles the Vatican's finances.

It is run by a directorate manned by a professional bank director general and vice-director who report to a committee of cardinals (called the Commission of Vigilance); a council of overseers (convened by the bank's president - a lay person); and ultimately to the Pope (or his close assistant the Cardinal Camerlengo during an interregnum). A prelate liaises between the commission and the council.

So the bank is an unusual body. And it is true that anyone controlling a Vatican Bank account will not be subject to suspicious transaction reports as laid down by FATF guidelines. However, given account holders must be a member of the church hierarchy, or associated with it, they are at least known - in many cases personally - by the Vatican State's senior clergy and officials. This is good or bad, depending on how you view the church. "Their correspondent banking relationships are basically everybody's dream", one US lawyer experienced in Vatican procedures told the Money Laundering Bulletin.

But of course being a member of a religious body is not a guarantee of good behaviour. So could the Vatican Bank's global network be abused for laundering dirty money? Absolutely claim some opponents of the church. For instance there are controversial proceedings filed by Serb and Jewish Holocaust survivors in a San Francisco Federal court (Alperin v Vatican Bank) claiming that the bank prospered from the deposited proceeds of stolen World War II assets: these claims remain unproven. And such a question was posed in a written question to the European Parliament in 2002 by independent Italian MEP Maurizio Turco (who has since ceased being a member). He asked whether the European Commission was taking any steps to combat money laundering in the Vatican State. He also asked whether there had been any international assessments on Vatican State money laundering controls, or whether Brussels had any knowledge of such legislation. The reason for his concern, he said was that the Vatican Bank was being given the right by the EU to issue Euro currency. He also highlighted three events giving rise to concern, his claims being protected by legal privilege through his position as an MEP:
* According to the Arresting Transnational Crime electronic journal of the US Department of State, he said, in October 2000 an attempt was made to defraud the Sicilian regional authorities of US$400 million in European funds, which it said would have been laundered through various banks, including the Vatican Bank.
* On 10 June 1984, the Turks and Caicos Islands were taken out of the Diocese of Nassau (Bahamas) and proclaimed a Missio Sui Iuris, under direct control of the Vatican. The same happened to the Cayman Islands, (which had formed part of the Diocese of Kingston in Jamaica) in the year 2000. Turco's parliamentary question noted that the American cardinal Theodore Edgar McCarrick was appointed Superior for the Turks and Caicos in 2001, while the American cardinal Adam Maida, member of the IOR Supervisory Board, is Superior for the Cayman Islands. "Both groups of islands are among the world's best-known offshore financial centres", noted the MEP.
* "During the 1980s a huge money-laundering operation involving among others the Pope's delegate in charge of the IOR [Vatican Bank], the American bishop Paul Marcinkus, was brought to light", said the question.

In reply, the then EU internal market Commissioner Frits Bolkestein noted: "The Commission is not aware of any anti-money laundering law in force in the VCS [Vatican City State]. However, as noted by the Honourable Member, the only bank operating in the VCS, the Istituto per le Opere di Religione, is also the Central Bank. Thus, since there is no commercial financial sector in the VCS, the scope for the application of normal anti-money laundering rules covering the financial system would appear to be necessarily limited". He conformed that as an independent non-EU country, the Vatican State had no duty to implement EU money laundering legislation, which is based in FATF rules.

That is not to say there is no law enforcement in the in the Vatican State. That is the state's Central Security Office, which was created by the Pontifical Commission for Vatican City State in 1970 through a law (number LXVII) which dissolved the Corps of Gendarmes, which was founded by Pope Pius VII in 1816. Henceforth and until now, this office has been charged with the overall responsibility for the enforcement of laws, regulations and ordinances of the world's smallest sovereign state. Slightly confusingly, a 1991 law changed the office's name to that of the Security Corps of Vatican City State, and then in 2002, back to the Corps of Gendarmes of Vatican City State, its old name. But this is not the gendarmes of old. That same year, former Pope John Paul II issued a new law (number CCCLXXXIV) assigning to the 130-officer Corps of Gendarmes another clarified set of responsibilities, including the enforcement of financial and commercial regulations, as well as border control, crime prevention and investigation, plus responsibility for security and public order. The gendarmes are run by the Vatican State's Security and Civil Defence Services Department, which is one of the state government's central offices. When coordination is required between the Vatican State law enforcement authorities and those in Italy and other countries, it is this office that manages this work. The office's head sits on the state's Governatorate - effectively - its cabinet - currently headed by its president Cardinal Giovanni Lajolo. Another important arm of this ruling body that is relevant to anti-money laundering controls is the State Accounting Administration, which oversees the Vatican State's general accounting procedures, bookkeeping, managing the treasury, the preparation of budgets and financial statements and audits.

This work has become increasingly important in recent years. The Vatican State did not even publish its budget figures until 1979, and did not release an independently audited annual balance sheet until March 1988, which - noted the Europa World Year Book of 2006: "For the first time in its history, [revealed] the church's financial affairs to public scrutiny". These have shown a tendency of the Vatican State to lapse into deficits in the 1980s and early 1990s, with its income from its bank, museums, shops, dioceses and financial investments being less than that needed to run its administrative apparatus. Accounts have been more balanced since then, although there was a deficit in US$22.5 million in 2003, followed by a surplus of US$3.7 million in 2004.

The Vatican Bank, however "has consistently returned an operating profit..." noted the year book. Its assets, claims the book "are believed to lie between US$3 billion and US$4 billion", taking "deposits from religious bodies and Vatican residents." Its accounting procedures appear to be separate from the rest of the Vatican State however: the Vatican Bank has its own auditors, who are officers of the IOR and operate within its directorate, a fact likely to cause some eyebrows to be raised over conflict of interest issues.

Also, to add to the opaqueness and complexity of Rome's accounts, unlike the city state, the Holy See has not published audited accounts. A Wall Street Journal inquiry quoted informed sources saying its total annual budget is roughly US$250 million. Much of this money, claimed the newspaper comes from the return on its investments, from several hundred apartments it rents out in Rome, and contributions from the church abroad).

It is these assets that have encouraged Turco and others to say that the Vatican State and its bank should conform to international anti-money laundering norms.

A common brickbat here was the scandal involving the Vatican Bank's involvement in the collapse of the Italian bank Banco Ambrosiano. The Vatican bank held a stake and Italian magistrates later held it partially responsible for Ambrosiano's US$1.5 billion in bad debts. While the Holy See did not accept any involvement in the failure, it did accept moral culpability and paid creditors US$244 million. The affair gained particular notoriety because Ambrosiano's president, Roberto Calvi, was later found dead hanging from Blackfriars Bridge in London in 1982: UK police claimed this was murder; the case has not been solved.

Another issue that has been highlighted by the European Commission is that the Vatican Bank does indirectly participate in the international banking system via TARGET (the Trans-European Automated Real-time Gross settlement Express Transfer system), which is used by other commercial banks. In an answer to queries from the European Parliament, the Commission noted that the bank was "an indirect participant" in TARGET, being "an institution which does not have its own account in a Real-Time Gross Settlement (RTGS) system but which is nonetheless acknowledged by a national RTGS system and covered by its rules, and which may be directly accessible within TARGET. All the transactions of an indirect participant are carried out on the account of a participant which has agreed to represent the indirect participant," noted the Commission.

Essentially this is because the Vatican Bank does not have branches and that for many transactions, such clearing a cheque outside Rome, the Vatican Bank needs to work with client banks to receive funds and make payments.

While critics may say this increases the bank's exposure to potential money launderers, it is equally true that such a system erects another firewall against wrongdoing, given that the commercial partner bank almost certainly uses FATF-approved AML procedures.

Also, the mere fact that the Vatican Bank has to use correspondent banks - even within Europe - highlights an innate strength in terms of detecting money laundering within its accounts: its small size. It really is a unique institution, with personal conversations generally required before any transaction takes place. In this sense, its weakness is its strength.

Take the Martin Frankel case, where a convicted American fraudster and money launderer persuaded an elderly priest - Msgr. Emilio Colagiovanni - to give credence to some scams. Frankel wanted to launder his ill gotten gains through a Vatican Bank account controlled by Colagiovanni as editor of the Catholic journal Monitor Ecclesiasticus. The priest said it was not possible, but if he had, doubtless someone would have noticed. After all, he had been depositing or withdrawing 400 to 500 Euros over 20 years while he ran the journal and if he had suddenly tried to deposit 5 million, it would have raised a red flag. 

It is also relatively easy to keep know who makes such judgement calls. The names of office holders in the Vatican Bank are published - in the Vatican's yearbook - the Annuario Pontificio, so as complex as the world's smallest sovereign state might be, it is possible to keep tabs on its operation.

Ultimately, a corrupt Vatican Bank account holder is going to need to persuade a lot of colleagues they are on the straight-and-narrow to get away with a crime, and one would hope (and expect) that there were enough honest people in a tight-knit religious institution to uncover and prevent a conspiracy. Whether the rest of the world would be told about it is another issue, of course.