SMALL EUROPEAN enclaves have given financial regulators big headaches in the past. Two of them, San Marino and the Vatican, will be visited by inspectors from Moneyval, the organisation set up to fight money-laundering and terrorist funding in Europe, in the final days of September. They will arrive at a delicate moment. Starting next spring, the European Union (EU) plans to pour about €209bn ($245bn) into Italy in order to help it recover from the covid-19 pandemic. Even allowing for inflation and economic growth, that is more than was invested in the country through the post-war Marshall Plan.
Much of the EU cash will be directed towards the poorer south of Italy. But that is where Italy’s mafias can most easily steer funds and contracts their way. Having two inadequately regulated mini-states on their doorstep would offer them an easy way to launder their gains. On a recent visit to Rome Catherine De Bolle, the executive director of Europol, warned that her organisation had detected a rise in organised crime’s penetration of the European economy and asked EU states to be particularly vigilant with regard to the recovery funds.
As Moneyval made clear in its last report in 2015, San Marino has made significant progress towards installing a robust anti-money-laundering system. But the Holy See looks more problematic, despite Pope Francis’s avowed intention of overhauling its tangled finances. Two controversies are swirling. The first has to do with the Vatican Bank, properly known as the Institute for the Works of Religion (IOR), a lender located within the city state. The second concerns a judicial investigation into dealings by the Roman Curia, the central administration of the Catholic church, the effects of which have rippled abroad.
Inspectors had hoped that the Vatican Bank was no longer a problem. In a report on the Holy See in 2017, Moneyval concluded that its anti-money-laundering procedures were “firmly established”. Yet the IOR is now ensnared in litigation, which ironically arises from the clean-up.
In March a Maltese court authorised three companies involved in a dispute with the bank to seize assets worth €29.5m— equivalent to more than three-quarters of the IOR’s profits in 2019. The two Malta-based investment companies and a Luxembourg-based subsidiary claim that, following a change of management, the IOR reneged on a commitment to invest €33m in the purchase and development of the building that once housed the Budapest Stock Exchange. (The IOR contends that the deal was altered in a way that prejudiced its interests and claims to have incurred losses and lost profits of up to €25.2m.)
Another controversy relates to the Curia. Several Vatican officials, clerical and lay, are being investigated by the city state’s prosecutors in connection with the purchase of a building in London that was partly financed using donations from the faithful. Prosecutors are reportedly considering bringing charges that could include extortion. In October 2019 Vatican gendarmes raided the offices of the department that bought the property: the Secretariat of State, the pre-eminent branch of the Vatican bureaucracy, which combines the roles of prime minister’s office and foreign ministry.
Most damagingly for the Vatican’s international credibility, the Holy See’s own regulatory authority was also raided in connection with the case and its director, Tommaso Di Ruzza, put under investigation. Why remains unclear; no charges have since been brought against any of the suspects. Now known as the Supervisory and Financial Information Authority, the Vatican’s regulator combines the roles of banking watchdog and financial-intelligence unit (FIU). Documents and data seized by the police included confidential information that foreign FIUs had sent to the Vatican. The Egmont Group, a network of most of the world’s FIUs, promptly excluded the Vatican regulator from its information-sharing mechanism and only reinstated it after the authority had brokered a deal with the prosecutors aimed at preventing similar episodes in future.
The raid appeared to breach an established norm: that FIUs should have the freedom to decide which cases of suspected financial jiggery-pokery should go to court. Whether coincidentally or not, on July 14th Germany’s FIU in Cologne was searched on the orders of prosecutors who suspected its employees of having failed to refer for prosecution the suspected laundering of some €1.7m.
Whether laws were broken in the complex transactions surrounding the London property deal is yet to be proven. But the affair highlights a key problem. The Curia has a sovereign-wealth fund, the Administration of the Patrimony of the Apostolic See, through which the Vatican’s investments might be expected to be channelled. Yet it is dotted with departments jealously guarding substantial pots of cash that are either undeclared or unquantified.
Cardinal George Pell, the first head of the Vatican’s “finance ministry”, the Secretariat for the Economy, revealed in 2014 that he had found “hundreds of millions of euros…tucked away”, in accounts off the Vatican’s balance-sheet. The cardinal, who was later charged with sexual assault in his native Australia, tried, convicted and acquitted on appeal, said that “it was impossible for anyone to know accurately what was going on overall”. Moneyval’s inspectors will need to work out how much, if at all, the situation has changed since then—an almighty task. ■
This article appeared in the Finance & economics section of the print edition under the headline “A holy mess”