It is anybody’s guess as to whether Francis’s incredible popularity can be sustained. But his historic international reception gave him enhanced power as a new Pontiff. No clerical faction was foolish enough to take him on. No one dared criticize him. Most inside the Vatican viewed the developments as a phenomenon on which to ride along. Francis, as a result, had an unprecedented opportunity to tackle significant Curial reforms. The challenge was great. The Pope oversaw an institution with 1.2 billion followers, 6 million lay employees, 4,500 bishops, 412,000 priests, and 865,000 members of religious institutes and schools. Catholic charities were the world’s largest (some twenty million people receiving some type of assistance).1
Near the top of his to-do list was the Vatican Bank. He knew reform there would have to be a centerpiece of his Papacy if he was going to successfully streamline the city-state’s finances. Instead of repeating Benedict’s first year of unfulfilled expectations, Francis did act, and often decisively. He was not long in office when he issued two Papal decrees intended to speed reviews and provide more transparent oversight. Unnamed Bank of Italy sources told the Financial Times that those early decrees “marked important steps toward real reform of the legal and institutional framework.”2 But they were stopgap measures. Francis was faced with a historic decision: whether to shutter the Vatican Bank and have the church rely on the banks of other countries, or undertake the systemic change that had frustrated his predecessors.3
René Brülhart’s AIF issued its 2012 annual report in May 2013, highlighting an enhanced screening system for reporting cash transactions and boasting it had more success in spotting suspicious activity—six cases had been sent on for investigation as opposed to only one the previous year.4 Meanwhile, the Vatican was working to meet a July deadline to submit an update to Moneyval demonstrating what progress it had made in those areas the evaluators had judged deficient.
Ernst von Freyberg went on the offensive for the IOR in his first full interview as president in May. Noting that during “the financial crisis we were never in trouble. No government had to bail us out, we are very, very safe,” he boasted the banks 2012 profit was $113 million. As for the IOR’s terrible reputation, he claimed it was largely the result of media “slander.”
“I can tell you that I have taken all the names I have found in the newspapers and looked them up myself. I didn’t find a single one of these names. This Mafia boss, this politician, Osama bin Laden. None of them have accounts here, nor are they delegates to accounts.”
Since Freyberg’s interview was with Vatican Radio, nobody pressed him on how secret proxies had been used for decades in the bank to hide the identities of true account owners. A simple name check would not have sufficed to uncover them then or now. But his quotes made for good copy.5
The real reason he had gone public was that top IOR officials had decided they needed to lobby for the bank’s survival as the rumors of its pending dissolution picked up pace. Freyberg had not yet had a personal audience with Francis, raising concerns that the Pope was putting it off so as not to confer legitimacy on the bank until he had decided on its future. “If we ask the question ‘should we close the IOR,’ our clients have voted 99.99 percent against it,” Freyberg said.6 Director General Paolo Cipriani followed up by telling reporters off the record that the bank’s Curial enemies had launched a vicious whisper campaign. On the record, he said that the IOR kept the church independent and that was not “just essential, but an obligation.”7
On June 26, Francis created a five-person commission and invested it with broad powers to do a top-to-bottom review of the bank. It had complete authority to access all the IOR’s files. That panel was tasked to provide Francis with guidance about how to bring the bank into “harmony” with its original ecclesiastical mission.8 And it came less than two weeks after the Pope had tapped Monsignor Battista Mario Salvatore Ricca as the interim prelate, replacing Monsignor Pioppo, who had been exiled to Equatorial Guinea in 2011.9 The pick of Ricca was a progressive choice by the Pope. In a few weeks, Ricca was under assault when L’Espresso reported scandalous details over his private life during his service as the Nuncio in Uruguay.10 According to the paper, Ricca had a semipublic affair with a Swiss army captain, and it had been the subject of nonstop scandal among Rome’s bishops. Once Ricca was beaten up at a gay bar. Another time, when firemen had to release him from a trapped elevator at the nunciature, he was found with a partially clothed young man.11 Some were bitter that Francis had chosen Ricca, while others contended he was a genuine reformer and that resurrecting a seamy past chapter was no more than a smear campaign by the old guard.12 After a few days the Vatican issued a statement that “the pope has listened to everyone and has confidence in Ricca.”13 Francis stuck by his choice.
Unknown outside of the Vatican, Francis had a newfound enthusiasm in tackling reform at the IOR. That summer he summoned to Rome six top Catholic financiers from around the globe.14 In a day-long meeting at the his Casa Santa Marta guesthouse, Francis told the moneymen he needed their help. The Pope, speaking Italian and relying on a translator, set forth a litany of financial problems facing the church. “You are the experts,” he said, “and I trust you. Now I want solutions to these problems, and I want them as soon as possible.”15 Those lay experts became directors of a new advisory council to guide the Pope in rolling out his reforms.16
Not even Francis, however, with all his good fortune, managed to get through 2013 without some bumps when it came to the Vatican Bank. Two days after he had appointed the special oversight commission, sixty-one-year-old Monsignor Nunzio Scarano, an APSA senior accountant, was arrested. Prosecutors charged he was the mastermind in helping friends avoid taxes on $26.2 million, some of it cash flown to Italy on a private jet from Switzerland.17 Scarano’s money flowed through two accounts at the Vatican Bank (one personal and one a charitable foundation he controlled). The IOR was back on the front pages (typical was The New York Times headline “Cleric Arrested in $26 Million Plot, Leaving New Blot on Vatican Bank”). And Scarano’s tale had all the elements that kept it newsworthy for the rest of the year. A banker before he was ordained a priest at the age of thirty-five, Scarano had been suspended from his APSA job the previous month over an investigation by prosecutors into whether he had laundered $750,000 of Mafia funds through his own Vatican account.18 His nickname was Don cinquecento (Monsignor 500) because he habitually flashed a thick wad of cash and boasted that the 500-euro note ($670) was his favorite. When he reported a multimillion-dollar art theft from his 7,500-square-foot luxury apartment in Salerno, police asked how a simple monsignor—who earned about $40,000 a year—could afford it all. “Donations from friends,” he replied.19 The millions he passed through his IOR account allegedly belonged to three brothers of a wealthy Italian shipbuilding family, close friends of then Italian Prime Minister Silvio Berlusconi. Arrested with Scarano was a suspended intelligence agent from Italy’s equivalent of the FBI. (Scarano’s trial started in September 2014 and he faces up to twenty years in prison if convicted.)20
Only a few days after Scarano’s arrest, the Vatican announced a shake-up inside the IOR. Gone were Paolo Cipriani, the bank’s director general, and his deputy, Massimo Tulli.21 The Vatican said their parting was “in the best interest of the institute and the Holy See.”22 But few were buying it. Their departure seemed hasty and unplanned, especially since there was no one set to replace the director general. Two Italian bankers with broad international experience in the private sector were brought in. One filled Tulli’s post while the other became the bank’s newly created chief risk officer.23 Freyberg announced that he would keep his president’s job while temporarily assuming Cipriani’s role.
The resignations caught Brülhart by surprise. He learned about them on his way to Sun City, South Africa, for the Egmont Group’s annual meeting. Just that week he had received the good news that the Vatican had gotten a prized membership in Egmont, becoming part of a club whose goal is to freely share financial information in order to fight money laundering and terrorism financing.
What Brülhart did not know is what had prompted the abrupt departure of the IOR duo. Behind the scenes, the Scarano prosecutors had informed the Vatican that they had wiretapped phone conversations that demonstrated Scarano was in regular touch with Cipriani and Tulli to get their approval to move huge amounts of cash through his accounts.24 When Brülhart learned about that, he pressed for full disclosure, contending to his colleagues that they should get credit for having taken swift action by dismissing the two bank officers. The old IOR would never have done that and it was to the Vatican’s credit that it happened now. But he was overruled and, not being at the city-state, he was unable to forcefully argue his case. Admitting publicly errors of that magnitude was a level of transparency for which the church was not yet ready.25 Brülhart was proven right, however. A week later Italy’s financial police, led by a Rome magistrate, released a twenty-five-page report about how the IOR had for years circumvented money laundering laws. The conclusion was a familiar one: the Vatican Bank had operated as an offshore bank in the heart of Rome.26 A few days later someone leaked documents to Reuters that revealed Roman prosecutors had concluded that Cipriani and Tulli violated Italy’s money laundering statutes by failing to provide sufficient information about Scarano’s transfers.27 Soon, Michele Briamonte, an IOR legal consultant best known for his private jet and flashy lifestyle, was pulled into the criminal probe for possible insider trading (no charges were filed against Briamonte but Cipriani and Tulli were indicted with money laundering violations in March 2014 and are awaiting trial).I Once again the IOR looked as though it was only reactive, instead of jumping ahead as Brülhart had suggested.
With Brülhart back from South Africa, he and Freyberg used the scandal to press their case to hire, for the first time in Vatican history, a financial consulting firm that could assist the AIF’s monitoring and enforcement. Their pick was Promontory Financial Group, a self-described “risk management and regulatory compliance consulting firm.” In lay speak it is a troubleshooter for all types of financial problems. Freyberg and Brülhart lobbied hard to get the approval for a $1 million contract retainer.29 By October there were nine Promontory employees at the bank, setting up temporarily in what used to be the oversized director general’s office. They cross-checked the paperwork against computer files to ensure there was proper documentation for each account and that the paper trail for money transactions was transparent. As of the close of 2013, about 25 percent of the IOR’s employees were from Promontory.30
During the coming months, the IOR opened a website (www.ior.va) and published an annual report. The website did not have online banking and the annual report did not list clients. Instead it explained what the Vatican Bank was and what it did. For the IOR, which historically had not even listed its address or telephone number in the Vatican’s annual yearbook, it was a modern way of demonstrating that change was under way.31
At the end of August, Francis replaced Secretary of State Bertone with Archbishop Pietro Parolin, the Papal Nuncio to Venezuela, the youngest man to hold the post since Eugenio Pacelli in the 1930s.32 Peter Sutherland, Goldman Sachs International’s nonexecutive chairman, briefed the Pope’s most senior advisors: “Transparency is important and necessary.”33 The Pope—who had made it clear he was personally overseeing the IOR reform—continued to set the overall tone. He appointed eight cardinals that October as special advisors in restructuring the Curia. “Heads of the Church have often been narcissists, flattered and thrilled by their courtiers,” Francis told them during their first meeting. “The Court is the leprosy of the Papacy.”34
And that same month he issued a motu proprio against money laundering and financing terrorism, reinforcing in clear language the importance of every Curial department to adhere to the letter of the law, but also reemphasizing the oversight power of Brülhart’s AIF when it came to the church’s internal finances.35 A month later Francis followed up on suggestions by Brülhart and issued a new motu proprio further strengthening the AIF.36
In comments made after the spring purge, Freyberg told reporters, “It is clear today that we need new leadership to increase the pace of this transformation process.” It took almost another five months, November 28, before the public got to see what Pope Francis and his Vatican Bank team meant by “new leadership.” Francis appointed his loyal private secretary, fifty-five-year-old Monsignor Alfred Xuereb, to a new supervisory IOR role.37 The Maltese native was the Pope’s eyes and ears when it came to the progress and activities of the two commissions studying the bank. Although Xuereb had no financial experience, his role was not to run the bank. Instead he had the Pope’s absolute trust. With his selection Francis had sent a message that he was watching those who were watching the Vatican Bank.38,II
One month later in December, the action-packed year ended when Moneyval released its latest report on the Vatican’s progress toward complying with EU money laundering, terrorism financing, and transparency statutes. It commended the city-state on making significant headway and noted that “a very wide range of legislative and other measures have been taken in a short time by the Holy See.” Nonetheless, it concluded more oversight was necessary. There were still inadequate controls at both the IOR and APSA to prevent financial crimes. In a direct reference to Brülhart’s AIF, Moneyval said it was “somewhat surprising” that his intelligence unit had not yet conducted any full inspections of either the bank or APSA. But AIF did get credit for closing several questionable IOR accounts and for flagging some potential money laundering.
Before the year ended, without any fanfare, Brülhart signed memorandums of understanding to share information about suspicious transactions with Germany, Italy, the United States, Spain, the Netherlands, Belgium, and Slovenia.40 And he was negotiating up to twenty more that he hoped to seal in 2014.41 Meanwhile, more big-name consulting firms had joined Promontory in trying to make the IOR bulletproof. They included EY (formerly Ernst & Young), KPMG, and Deloitte & Touche. Separately, Francis hired American-based McKinsey & Co. and Lord Christopher Patten, the ex-chief of the BBC, to overhaul the Vatican’s media relations.
For observers of the Vatican Bank, such as Nigel Baker, Britain’s savvy ambassador to the Holy See, the pace of reform under Francis was “unprecedented.” Baker noted that when he was appointed ambassador in 2011, “It was a standing joke that whenever a journalist wrote an article about the IOR, it had to include a mention of Banco Ambrosiano and Roberto Calvi under Blackfriars Bridge. Yet that scandal happened over 30 years ago. There was a sense amongst commentators that the Holy See had in the past only paid lip service to the need to change its financial structures.” The move toward reform, transparency, and modernization, he said, had begun under Benedict but Francis had made it a top priority.42
Two thousand and fourteen was the year when Francis proved his commitment to changing forever the culture of the Vatican Bank. On January 16, he purged the IOR’s top ranks because he was not satisfied with the pace of its reforms. His target this time was the bank’s traditional oversight committee of cardinals. Before he resigned, Benedict had renewed the terms for each committee member, including Cardinals Bertone, Italy’s Domenico Calcagno, Brazil’s Odilo Scherer, India’s Telesphore Topp, and France’s Jean-Louis Tauran. Less than a year into their five-year terms, Francis replaced all but Tauran. The incoming Secretary of State, Pietro Parolin, took Bertone’s spot as chairman. The new slate of cardinals were known as reformists who had extensive experience in financial affairs in their own dioceses.43
Vatican Bank observers were again impressed. “This is an important turn in the political economy of the Vatican,” noted Professor Giuseppe Di Taranto, an economist at Rome’s LUISS University. “It is following the new political line of Pope Francis towards transparency for Vatican finance.”44
Francis was not done. Two weeks later, on January 31, the Pope swept clean the last of the old financial guard. Out was AIF’s president, seventy-six-year-old Cardinal Attilio Nicora. His replacement was sixty-six-year-old Bishop Giorgio Corbellini, a legal expert and president of the city-state’s labor office responsible for dealing with the lay workers. Corbellini was also considered a reformer.45 And his selection was timed to coincide with the hiring of two international firms to audit Vatican finances.46
There was no better reminder of the consequences of failure to all those entrusted with getting the IOR onto the OECD’s white list.47 And the deadline was in place. It was two years and counting. When Moneyval finished its evaluation the previous December, it set 2015 for the next report from the Vatican.
The Vatican was a place in flux. In February, Francis issued a motu proprio that established a new division, the Secretariat for the Economy. It was the same type of bold decree that his predecessor, Benedict, had used in 2010 to commit the Vatican to its first anti-money-laundering law. The Secretariat was given broad authority to govern all the city-state’s money matters.48 It was tasked with coordinating the budgets for nearly two dozen Curial divisions. And Francis put his personal stamp on the new department by picking one of his closest advisors, Australia’s no-nonsense Cardinal George Pell, as its chief.49 The motu proprio also made clear that moving forward, APSA would operate as the Vatican’s central bank.
In April, Francis ended a year of speculation by announcing finally that he would not close the Vatican Bank. The press office issued a statement that the IOR “will continue to serve with prudence and provide specialized financial services to the [Roman] Catholic Church worldwide.”50 (“The Vatican Bank Is Back from the Dead” was the headline in The Daily Beast.)51 Brülhart’s AIF in late May showed how well its regulatory system was working: it had uncovered 202 suspicious transactions inside the IOR in 2013, compared to just six the previous year.52
According to Massimo Faggioli, an Italian theology professor who has long studied the Vatican, Francis acted decisively because he is the first Pope in the last thirty-five years to understand how important it is to achieve substantive reform. “Pope John Paul II didn’t touch the bank because it served his purpose of funding Solidarity from the Vatican. Pope Benedict did not touch it because he had no interest in controlling it. Pope Francis is different because he knows the damage that has been done to the credibility of the church by this very small bank and its history of scandals.”53
In May, the German newspaper Bild reported that former Secretary of State Bertone was under criminal investigation for approving a $20 million Vatican loan to a friend’s television production company—over the objection of ex-IOR chief Gotti Tedeschi. Bertone’s friend, an Opus Dei member, defaulted on the questionable loan.54 According to Bild, there were questions about whether the ninety-three-year-old head of the company that made religiously themed films had kicked some money back to the Secretary of State’s office. While reviewing records in 2013, outside auditors had discovered the loan and the IOR board subsequently had to write it off.55
It was the type of unexpected story that in the past had presaged a new scandal that put the church on the defensive. But Francis did not allow the report to fester, instead dispatching his spokesman, Federico Lombardi, the very next day to unequivocally deny its veracity.56 And less than two weeks later, the Pope ensured that any lingering rumors of a Bertone probe were forgotten because of the dramatic announcement that the Pontiff had fired the entire five-man board of Brülhart’s AIF.57
On a flight returning to Rome from Israel, Francis told reporters that he had made new appointments because “economic administration calls for honesty and transparency. . . . The key is trying to avoid that there are more [scandals].”58
Brülhart had successfully persuaded the Pope to replace his five “old guard” directors with independent professionals who had qualifications similar to his own.59 And Brülhart got a new vice director, Tommaso di Ruzza, a respected jurist who had helped draft the Vatican’s anti-money-laundering statutes.60 The press coverage of the sacking and the new appointments was universally positive, casting the Pope as someone willing to make bold moves to clean up the financial morass he inherited.61
Francis—who once said “Money is useful to carry out many things . . . but when your heart is attached to it, it destroys you”—put the final touches on his revolution in Vatican finances in July.62 He replaced Ernst von Freyburg, the IOR’s chief, with Jean-Baptiste de Franssu, the former CEO of Investco Europe and the founder of a firm that specialized in merger and acquisition consultations.63 Joining him on the board were new directors who had strong experience in private finance and Wall Street. Michael Hintze had worked at Salomon Brothers, then ran all UK trading at Goldman Sachs, before becoming the chief of convertible bonds in Europe for Credit Suisse, and finally opening his own hedge fund (CQS). Another new director was Clemens Boersig, a former chairman of Deutsche Bank. And for the first time, Francis tapped a woman to serve as a director, Mary Ann Glendon, a seventy-four-year-old Harvard law professor and ex–United States ambassador to the Vatican.64
“Vatican Turns to Wall Street to Fix Bank” was the lead story on CNN.65 The IOR released its annual report for 2013 on the same day as the director shuffle. It provided further evidence that a complete shakeup of the old regime was furiously under way behind the walls of the city-state. About 3,500 IOR accounts had been closed during the previous year—some because they were dormant, others because they did not qualify in the first place.66 The private accounts held by Italy’s ultra-rich and politically well connected, the source of so much scandal that had plagued the bank for decades, were under assault by the reformers.
And yet another significant restructuring was rolled out. The IOR’s investment work would be moved to a newly created division, Vatican Asset Management.67 Going forward, the Vatican Bank would primarily be a payment service and financial advisor for employees, Catholic charities, and religious orders.68 The revamped IOR would no longer be able to trade in property and stocks as it did in its heyday under Nogara and Marcinkus.
Cardinal George Pell, the new über-cleric of the Vatican’s money, drove home the point at a press conference: “Our ambition is to become something of a model of financial management, rather than the cause for occasional scandal.”69 Pell told the Boston Globe, “The ambition is to be boringly successful, to get off the gossip pages. The aim is to become a model of good practice in financial administration. Along the way, we’re not going to generate any less revenue for the works of the Church.”70
• • •
In September 2013, the author met René Brülhart in the courtyard of a run-down Roman sixteenth-century palazzo that is now a hotel for pilgrims and visitors to nearby Vatican City. Over two hours, Brülhart provided an intensive and thorough insider’s view of the massive reforms that were then under way. The Vatican was unique, said Brülhart. As opposed to Liechtenstein, or work he had performed in his native Switzerland, the city-state was not a financial center. There was no commercial activity. He had all the power and latitude he needed, he assured me, to make certain the IOR was compliant and ready to be added to the white list. He thought that “most of the difficult steps are ahead” and estimated it would take three to five years “to fully implement.”71
“I came here with no expectations,” he said. “But I can see at the end delivering a financial institution to the Holy See that is above reproach. It is certainly not simple to do, but it is achievable.”
What if Marcinkus saw the bank as it operated today?
“I don’t think he would recognize it. And that is a good thing.”
I. That same month, March, after Italian prosecutors cleared Gotti Tedeschi in their money laundering probe, the ex-IOR chief announced that he was considering suing the Vatican because of the damage to his reputation done by his dismissal. “They have to say they’re sorry,” Gotti Tedeschi told reporters, “and finally explain after two years why they did what they did. . . . They ruined my life. It’s a shame that it was the Italian magistrates who had to clear this up and not the Church.”28
II. Two days after Xuereb’s appointment, Freyberg announced that deputy director Rolando Marranci, who had joined the IOR only in June, had been promoted to serve as the bank’s director general.39