Pope Francis listens attentively at the front of the packed lecture hall, a one-man island of white amid a sea of cardinals in black cassocks and scarlet zucchettos, or skullcaps. The pope and these “princes” of the Roman Catholic Church have gathered in Vatican City’s Synod Hall, a modern glass and steel building steps from the Renaissance-era St. Peter’s Basilica, to get an update on the financial health of the Holy See.
In any other setting, the scene would have been unremarkable: PowerPoint presentations, charts, graphs. But the Vatican has until recently regarded its finances as so sensitive that its full accounts were known only to the pope and his closest aides. The Feb. 13 briefing, says Vatican spokesman Father Federico Lombardi, was the first time the Consistory of Cardinals had ever received such a detailed look at the books. Equally groundbreaking, the presenters included lay experts, not just clergy. And some of them spoke in English, the language of commerce, not in one of the Vatican’s two recognized tongues: Italian and Latin.
As Bloomberg Markets magazine will report in its June issue, the Synod Hall gathering reinforced the notion that Pope Francis is not your father’s Holy Father. From his stand on homosexuality (of gay priests, he once said, “Who am I to judge?”) to helping midwife a rapprochement between the U.S. and Cuba to his social-media savvy (he tweets!), Francis has made headlines and stirred the faithful. He’s reinvigorated a church poisoned by years of sex-abuse scandals and perceived even by many devout Catholics as out of sync with modernity. What’s more, the princely assemblage highlighted a more earthly side of Francis’s church reforms: risking a potentially crippling confrontation with the Roman Curia, the Holy See’s powerful governing bureaucracy, in order to attack waste, mismanagement, and corruption.
The Vatican isn’t a financial powerhouse. Aside from its priceless art collection, it controls less than $7 billion in assets—and that’s being generous in valuing its real estate portfolio. Separately, the Vatican Bank, formally known as the Institute for the Works of Religion, has less than $6.5 billion in assets, most belonging not to the Vatican itself but to Catholic dioceses, orders, and charities. Still, management of the Vatican’s finances matters because it reflects on the moral authority of the church, says Joseph F. X. Zahra, a Maltese businessman and economist who is one of Francis’s closest financial advisers.
This is especially true at a time when the pope is preaching ethical, socially responsible capitalism to the 1.2 billion Catholic faithful and beyond, Zahra says. To tackle turbid, sometimes corrupt, finances, the pope is bringing in international accounting standards, Big Four audit firms such as KPMG and Ernst & Young, a new Vatican finance ministry, and an increasingly global workforce.
Other popes have tried to reform the antiquated Curia—long dominated by Italian cardinals—and failed. “Curial reform is really a stillborn child of Vatican II,” says Robert Mickens, editor-in-chief of Global Pulse, an online Catholic magazine. The Second Vatican Council, begun under Pope John XXIII in 1962 and concluded under Pope Paul VI in 1965, introduced sweeping liturgical and doctrinal modernizations but had only a modest impact on the administration of the Holy See.
In 2010, Francis’s predecessor, Pope Benedict XVI, promulgated the Vatican’s first anti–money laundering law and created its first financial regulator. In 2011, upending centuries of Vatican resistance to outside scrutiny, he invited the Council of Europe’s Moneyval anti–money laundering advisory committee to evaluate the Holy See’s practices.
Then, in May 2012, Benedict’s small revolution came to a halt. Ettore Gotti Tedeschi, his transparency-minded Vatican Bank president, was unseated. Gotti Tedeschi, an executive at Banco Santander in Milan, says he was ousted because his reform drive threatened the interests of formidable forces within the Curia; the Vatican says the bank’s board lost confidence in him. That same year, leaked confidential Vatican documents alleged Vatican City officials had awarded favored companies inflated, no-bid contracts and showed the Vatican Bank wasn’t cooperating with Italian organized-crime investigations.
When the College of Cardinals selected Jorge Mario Bergoglio to be pope in March 2013, it gave the Argentine prelate a mandate for financial reform, according to Cardinal Wilfrid Fox Napier, the archbishop of Durban, South Africa. The cardinals’ desire for scandal-free Vatican finances dominated their pre-election meetings, Napier says. “We needed to get rid of this cloud that was hanging over the church: The Vatican Bank could be used for money laundering; the Vatican Bank is not being run properly,” he says.
The Vatican Bank has seen enough scandal and intrigue to fill a bookshelf of Dan Brown novels. (See chart below.) Pope Pius XII created it in 1942 on sovereign Holy See territory to circumvent a U.S.-enforced ban on wire transfers out of Axis nations, including Italy. The bank doesn’t make loans, but it does take deposits, offer asset management services, and process wire transfers. Only the Holy See and Catholic organizations, charities, clergy, and Vatican City employees are supposed to have accounts there. And yet for decades, the institution, opaque and unregulated, functioned as an offshore bank in the heart of Rome, much to the vexation of European regulators and police, whose jurisdiction stopped at the Vatican’s walls.
The most infamous of the bank’s scandals involved the mysterious 1982 death of Roberto Calvi, who was found hanged beneath London’s Blackfriars Bridge, his clothes stuffed with bricks. Calvi was chairman of Milan’s Banco Ambrosiano, which collapsed that year. The Vatican Bank, which was Ambrosiano’s largest shareholder and had vouched for many of Calvi’s suspect investments, ended up paying out $244 million to settle claims from Ambrosiano’s creditors. Italian prosecutors concluded in 1997 that the Sicilian Mafia probably killed Calvi, although no one has been convicted of his murder. As distant as the Ambrosiano affair is, John Allen Jr., editor of the Catholic website Crux, says the rallying cry at the March 2013 conclave that elected Francis was, “No more Calvis.”
It didn’t take long for the pope to be handed a mini-Calvi moment of his own. On June 28, Italian authorities arrested a priest, a suspended member of Italy’s secret service, and a stockbroker; prosecutors allege the men had attempted to smuggle €20 million ($21 million) in undeclared cash into Italy from Switzerland aboard a private plane. The priest was Monsignor Nunzio Scarano, formerly the chief accountant for the department that manages the Vatican’s real estate and investment portfolios. Among his colleagues at the Vatican, Scarano had earned the nickname “Monsignor Cinquecento” because of his fondness for carrying around €500 notes.
Prosecutors say Scarano used his Vatican Bank accounts to launder money for businessmen in Naples. Scarano, currently on trial, has denied the charges. The Vatican Bank’s second- and third-highest-ranking employees, who had signed off on Scarano’s money transfers, resigned.
On a flight from Rio de Janeiro to Rome in July 2013, Francis told reporters the Scarano affair forced him to accelerate his reform calendar. “The financial part I was planning to address next year, because it is not the most important thing that needed to be done,” the pope said. “But the agenda changed on account of circumstances.” Events were now causing him to act. “You try to go in one direction,” he said, “but then someone throws you a ball from another direction, and you have to bat it back.”
Francis’s first move was to summon to Rome six Davos-caliber lay Catholics, including Zahra, a former chairman of Malta’s Bank of Valletta and director of the island nation’s central bank, who chaired the group; George Yeo, a former Singapore foreign minister; Jochen Messemer, chairman of insurer Ergo; and Jean-Baptiste de Franssu, the former head of asset manager Invesco’s European business. They met at Casa Santa Marta, the limestone guesthouse where Francis lives, having shunned the traditional papal apartments in the Apostolic Palace.
The pontiff charged the group with figuring out how to make the Vatican’s financial operations transparent and accountable. “He wanted to make sure that the values of the church were actually moving the administration and the finances of the Holy See,” says Zahra, who has photos of audiences with Francis and Benedict on his office credenza. As Zahra’s commission deliberated, Zahra says, Francis kept close tabs, even dropping in on meetings. “This was not an arm’s-length exercise,” he says.
In February 2014, acting on the Zahra commission’s recommendations, the pope announced the first major changes in the structure of the Curia since Paul VI’s papacy 50 years earlier. He established a new Secretariat for the Economy—essentially a Vatican finance ministry—and a 15-member Council for the Economy to advise him on policy. The council is headed by a cardinal but includes seven lay members with voting power—including Zahra and two of his commissioners. For the first time, nonclergy are more than mere advisers. “This is an enormously significant step,” says Kerry Robinson, executive director of the National Leadership Roundtable on Church Management in Washington, which advises U.S. dioceses.
To head the new secretariat, Francis appointed Australian Cardinal George Pell. A blunt-talking former rugby player, Pell, 73, has a reputation as a tough administrator and one of the College of Cardinals’ loudest advocates for financial reform. He’s also the target of criticism: An Australian government commission admonished Pell for his zealous efforts to dissuade victims of clerical sexual abuse from pursuing legal action. Unlike Francis, Pell is a theological conservative, an advocate, for example, of the pre–Vatican II Tridentine Mass. But Global Pulse’s Mickens sees in Pell’s appointment evidence of Francis’s political genius: an example of keeping your friends close and your enemies closer. Pell declined to be interviewed for this story.
Pell announced a flurry of changes. He required all Vatican departments to use international accounting standards and, beginning later this year, to submit detailed annual budgets and quarterly reports. (In the past, there were no standard accounting procedures, and budgets were sketchy summaries of total spending.) His secretariat would take control of the Vatican’s real estate portfolio. He wanted English to become the official language of his ministry. He would report only to the pope.
With every step, however, Pell has accumulated potent foes within the Curia, particularly after saying on several occasions that “Italian culture” was to blame for the Vatican’s opaque bookkeeping. Anti-reformers fought back. First, a committee of cardinals that reviews Vatican laws asked Francis to consider curbing Pell’s independence, substantially reducing the role of lay experts, and exempting several large Vatican offices from having to submit budgets to Pell.
Then, in late February, someone leaked copies of Pell’s own expenses to the Italian newsmagazine L’Espresso. The documents showed Pell’s office had spent €500,000 in six months on business-class flights, pricey office furniture, and generous salaries for lay financial experts. Potentially most embarrassing, Pell expensed a €3,000 bill from Ditta Annibale Gammarelli, Rome’s famous ecclesiastical tailor. Pell’s office was forced to deny speculation he had ordered a cappa magna, the long-trained silk mantle favored by ultratraditionalists; the bill, his office said, was for chapel vestments.
Lombardi, the Vatican spokesman, called the leaks “illegal” and “petty and undignified.” To Crux’s Allen, they were a dismaying sign that “the nasty is back” in Vatican politics—and that Francis’s reforms were in danger of falling victim to the same Curial infighting that hobbled Benedict’s papacy.
On Feb. 22, when Francis signed a set of new economic statutes, he gave Pell part of what he wanted. Pell’s secretariat would report to the Council for the Economy, not directly to the pontiff. Real estate would remain outside Pell’s direct control. English and Italian would be the secretariat’s working languages.
Overall, though, it was a win for Pell and for Zahra’s commission: No departments would be exempt from budgetary oversight, and the voting power of the lay experts was confirmed. With the new statutes, Allen says, Francis has proved he won’t be intimidated or hamstrung by the Curia. Others, such as Andrea Tornielli, a veteran Vatican journalist for Italy’s La Stampa newspaper, remain skeptical. He says changing the Curia’s structure won’t change its culture. “Real reform of the Curia requires changing the hearts of the people there,” he says.
The Vatican Bank itself was fortunate to survive Francis’s financial housecleaning. The pope at one point considered simply closing it. “St. Peter didn’t have a bank account,” Francis said during a mass on June 11, 2013. But the reform efforts of Ernst von Freyberg, the aristocratic German financier who assumed the bank presidency in the waning days of Benedict’s papacy, convinced Francis the institution still serves a vital purpose: It helps poor dioceses, especially in Africa and Asia, safeguard their limited funds, and it enables charities to transfer money to the needy in remote or war-torn places, such as Syria. In addition, the Holy See is dependent on the bank’s profits. Without income from the bank, the state would operate in the red.
Secrecy was the bank’s original sin, and von Freyberg set about atoning for it. He invited journalists inside the fortresslike headquarters that once served as a gunpowder store. The bank, which previously hadn’t even listed its phone number in the Vatican directory, launched a website. In October 2013, it published its first-ever annual report. In his transparency drive, von Freyberg has a formidable ally in René Bruelhart, who was hired in late 2012 to head the Vatican’s newly created regulator, the Financial Intelligence Authority. Bruelhart, a suave 42-year-old Swiss lawyer who favors dark, skinny suits and fashionable stubble, had previously been the director of the anti–money laundering agency in Liechtenstein. “The Vatican has a very strong obligation—a moral obligation—not toward supervisors or shareholders but to 1.2 billion Catholics in the world,” he says.
To that end, the Vatican Bank has closed hundreds of dodgy accounts. The 2012 Moneyval assessment had found that 10 percent of the cardinals holding accounts were actually deceased. Those accounts have been shuttered. More than 750 others held by people not entitled to use the bank—including former diplomats, doctors, lawyers, and even a nephew of Pope Pius XII—have also been closed or are in the process of being closed.
Promontory Financial Group, a compliance consulting firm in Washington, helped the bank strengthen its know-your-customer requirements and install software to hunt for suspicious transactions. Before Bruelhart arrived, the financial intelligence unit had only ever examined one such transaction. By the end of 2013, the number was 202, he says. “We now have a full-fledged institutional and legal framework in place that is completely in line with international standards,” Bruelhart says.
Having spared the Vatican Bank, Francis has big plans for it. In July 2014, he replaced von Freyberg—who stepped down to run his family’s shipping and engineering business—with the Zahra commission’s de Franssu. The Frenchman’s asset management experience was a key factor in his appointment, Zahra says. The pope wants to create a hub for Catholic investing. Francis’s vision is of a bank offering Catholic institutions attractive, socially responsible returns.
The concept has potential, says Crux’s Allen. But, he cautions, “a lot of bishops would be very skeptical investing any money they ever need to see again in something run by the Vatican.” It’s possible that Francis, who has surprised Catholics and others in so many ways so far, will overcome this skepticism, too. As his chief reformer Pell has written, Francis knows that “a poor church, for the poor, should not be poorly managed.”
This story appears in the June 2015 issue of Bloomberg Markets.
For more, read this Bloomberg View editorial: Shine a Light on the Vatican Bank