Merchants in the Temple (11 page)

On November 22 the relations with the Federal Reserve were suspended. Calcagno wrote to Vice President Fogarty to indicate that Mennini was no longer an APSA official. In his immediate reply, the American banker tried to put this case and the embarrassment behind them:

For more than seventy years the Federal Reserve Bank of New York has enjoyed a productive relationship with APSA, and in particular I have had the pleasure of working with Mr. Giorgio Stoppa as well as with Mr. Mennini on questions related to your account with us. I can't wait to maintain and improve the relations between our two institutions, and I can't wait to develop effective working relations with the deputies during this transitional period for APSA … I hope that my conversation with him during this transitional period will not be a cause of difficulty for you, Cardinal, or for APSA. I am preparing a note with APSA on the provision of banknotes in US dollars, and I would be happy to know to whom you would prefer that I address it at APSA.

In the next few months Mennini's activities would continue to be monitored discreetly. He still had important posts with the APSA real estate agents in Europe, which led de Franssu, in a letter of January 22, 2014, to ask Cardinal Calcagno to quickly have Mennini removed from the various boards of the companies associated with APSA, “considering the risks to our reputation we believe that this matter has to be addressed with a certain sense of urgency.”
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Sample Audits: 94 Million in Off-the-Books Accounts

The Commission continued to comb through the books of the administrative bodies of the Holy See. The international banking community and the institutional oversight bodies, starting with Moneyval (the Council of Europe's Committee of Experts on Anti-Money Laundering Measures), had always viewed Vatican banking with a certain skepticism. In its first mutual evaluation report of the Holy See in July 2012, Moneyval had already identified various gaps in the financial statements. The Vatican had long resisted the anti-money-laundering regulations adopted in modern countries. The proponents of greater transparency at the Vatican tended to be punished rather than rewarded, like Monsignor Viganò, who was banished to Washington, and former IOR President Ettore Gotti Tedeschi, who was ousted from the bank on May 24, 2012 after being subjected to a smear campaign.

During the first year of Francis's papacy, Vatican bookkeeping was found noncompliant with common modern and transparent accounting standards. When COSEA started to sift through the accounts, the situation the examiners found was even worse than they had expected. According to a document in my possession submitted to the cardinals in February 2014, “There are significant amounts of money, properties and other assets that are not recorded in the annual financial reports of the Holy See.”
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In other words, “there is an unidentified amount of money in the bank accounts that is not recorded.”

This was a denunciation of a system that had been in place since the times of Marcinkus and the IOR scandals. During critical moments it was kept quiet. To prevent reforms, it came out again forcefully as soon as the crisis was over. Large sums of money were being held in bank accounts listed to nonexistent charitable foundations. Hidden assets were kept off the books. Securities were not included in the normal bookkeeping so that they could be used for obscure purposes. The international auditors had repeatedly expressed their alarm, reporting the existence of “slush funds,” enabled by a kind of double-entry bookkeeping practiced by some departments. But the Pope did not ignore the reports, and he requested further exploration and verification. The size and the extent of the problem becomes even more disturbing when we read the confidential internal documents:

An analysis of the four sample entities reveals an amount of at least 94 million that is not recorded in the annual financial statements of the Holy See as of December 31, 2012. With 43 million to the Congregation for Asian Churches, 37 to the Nunciatures, 13 to Propaganda Fide and 1 to the Congregation for Saints.
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This is caused by the lack of preventive oversight whereby the various congregations and councils … have no information about how much they are allowed to spend or the type of expenditures they are allowed to make. It is estimated that considerable assets are managed by the Secretariat of State that do not appear in any financial statements, and that have not been examined by outside auditors. [By the same token] no transparency exists on the management of the residuals of the Peter's Pence.

The Risks of Those Ten Billion in Investments

Francis wanted to know more about the management of the immense sums of money held in the vaults, derived from revenue, offerings, and the Peter's Pence. Were these assets being used to generate income? Where and according to what criteria? Investments represent one of the largest sources of earnings for Vatican accounts: they guarantee interests that can help pay the high expenses of the Curia and facilitate the evangelical action. But the investments were also exposed to extremely high risks that were being uncovered in many departments. Starting with APSA:

Various Vatican institutions manage assets that belong to institutions of the Holy See, for a value of four billion euros, and assets held by third parties, for another six billion, for a total of ten billion euros. Of these, nine are invested in stocks and one in real estate. Major gaps have been identified in governance, in the process of investment and distribution of the same. One example is from the diversification of the financial portfolio of APSA for 1.1 billion euros starting in September 2013. The investments of 60% of the APSA clients are concentrated on four or fewer stocks. Of 60 APSA clients, with a current portfolio of 1.1 billion, 35 are exposed to an extremely high risk in their portfolios, a risk of loss of value due to the lack of diversification.

Another specific example is the concentration of APSA Certificates of Deposit (CDs) at issuing banks. Of 255 million invested, 80% is invested at [a single credit institute], Banca Prossima, creating high exposure to financial risk. APSA is a hybrid entity that conducts too many functions: from the management of holdings to pay service similar to those of a commercial bank, to the emergency cash procurement, to the providing of support services (human resources, information technology, procurement) to other entities of the Holy See.

In the event of a sharp downturn in the market, it was incredibly risky to concentrate as much as 80 percent of investments in a single credit institution or on just a few stocks. There is no explanation in the documents I have seen as to why the prelates of the Curia chose Banca Prossima, but this choice certainly placed the client—in this case the Vatican—in a high-risk situation. At APSA, the inspection by the Promontory Financial Group also found 92 dysfunctions connected to various “typologies of risk.” Here are the most significant:

1.
Reputation: some bank accounts identified with suspicious activities [were] handed over to AIF [the internal audit organ];

2. Loss of income: weak procedures for the management of real estate holdings, insufficient performance by the stocks;

3. Holdings management: the Investment Committee is ineffective;

4. Operative level: use of paper orders. Not addressing the risks identified could lead to potential major financial losses for the Holy See, the inability to spot suspicious transactions and to continue to procure liquidity at the Holy See.

Faced with this situation, Francis's revolution stepped up its pace, moving toward precise goals and following specific strategies: to prevent scandals and an uproar, the cardinals of the old guard were not fired but effectively “put into receivership,” like Versaldi at the Prefecture, with the monitoring oversight of the COSEA coordinator, Vallejo Balda, or Calcagno at APSA, in a kind of protective quarantine.

In the meantime, Francis was preparing his next revolution. The whole economic structure of the Holy See was being redesigned, cutting the Secretariat of State in half to reduce its enormous power. Cardinal Parolin and his deputy, Giovanni Angelo Becciu, would continue to manage diplomatic activities and internal affairs. But on financial matters, Francis studied the rules and regulations to create a new body that would effectively “void” the power centers that he had not been able to destabilize.

In February 2014, the Pope issued a
motu proprio
(a decree of his own initiative), ordering “a new coordination for economic and administrative affairs,” a kind of Vatican superministry for the Economy. The organization would be divided into two parts: a Secretariat for the Economy, led by Cardinal George Pell, and a Council for the Economy, consisting of eight cardinals and seven laypeople, of various nationalities and with financial expertise and recognized professionalism, to which a General Auditor was added, appointed directly by the Holy Father. The new auditor would act as a watchdog over the powers that be. The message was delivered by the Holy Father's spokesman, Federico Lombardi, in the calm and collected tone of official communiqués: “The Prefecture for Economic Affairs, currently led by Cardinal Giuseppe Versaldi, will work closely with the auditor.”

The normal functions of APSA would also be downsized: all of the activity pertaining to real estate management and personnel would become the competence of a new body. In the next chapters I will describe this revolutionary reform, which was decided, “pursuant to the recommendations of the COSEA Commission,” according to the official press release. The Pope's agenda would continue to be unrelenting and intolerant of delays.

Other problems and critical areas would arrive from a new source, the Governorate, the body that manages all the commercial activities (from the museums to the shops), procurement (from energy to the telephones), construction projects, and contracts. A torrent of money is involved there, too. But Francis would not retreat. With his loyalists he moved inside and outside the walls to seek new allies and break with the past once and for all.

 

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The Sins and Vices of the Curia

The Pontifical Commission ran into another problem almost immediately: it had cast its net too wide. There were too many financial transactions to analyze, too many million-euro contracts to inspect. It would be impossible to complete the audit in a few short months and provide Pope Francis with the prompt, specific, and effective indications he would need to initiate his reforms.

The auditors were in a race against the clock and also against the odds, if past experience was any indication: in the last decades of the twentieth century, every previous attempt at reform had failed. The Curia is like a soft belly, absorbing and normalizing any attempt at change. Inertia is its default mode. “Popes may change, but we remain,” was a favorite saying of the cardinals who, while feigning an openness to change, would stop at nothing to delay or even derail the reform. But Francis remained firm in his response: “A cardinal enters the Church of Rome, not a royal court. May all of us avoid habits and ways of acting typical of a court: intrigue, gossip, favoritism and partiality.”
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In late 2013 COSEA found itself being stonewalled by the Governorate. Neither the President of the Governorate, Cardinal Giuseppe Bertello, nor the Secretary General, Monsignor Giuseppe Sacco, had satisfied COSEA's preliminary request for documentation. In a letter of July 31, 2013, this is how they responded to the letter from the head of the Prefecture, Cardinal Versaldi:

Most Reverend Eminence,

 … I hasten to inform you that for the exercise of its institutional purposes, the Governorate has for the current year issued 18,850 orders for the procurement of goods and/or services (some in fulfillment of existing contracts). The orders made in previous years and that, to date, have not yet been fully processed, amount to 4,649, for a total of 23,499 documents (60% of which concern the purchase of goods for resale). No documentation has been produced for these operations and indications in this regard are awaited.

Francis was so troubled by what he was hearing that he demanded more detailed information. It is the job of Monsignor Alfred Xuereb, his personal secretary, to shield the Holy Father from attempts at sabotage. Xuereb assessed the situation carefully, seeking the advice of others, in particular Monsignor Paolo Nicolini, the head of the Vatican museums. Nicolini represented the institutional memory of past reform initiatives, and he gave Xuereb a detailed account of the wasteful and faulty renewal processes that had taken place first under John Paul II and then under Benedict. Time and again, good ideas and high hopes had met the same bitter end: frustration and zero results.

At Xuereb's request, Nicolini prepared a three-page document in January 2014 with the title “A Bit of History.” His informal report mentioned in particular a project to standardize administrative procedures from 1999, during the papacy of John Paul II. The new system was obsolete and lacking in transparency.
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In a three-year period, the Cap Gemini Ernst & Young corporation was paid an astronomical fee: ten billion in old Italian liras (the equivalent of 5.6 million euros) for its consultancy on the Vatican accounting system. Although the initiative was needed, it was far too expensive and it did not solve the problems. In his report Nicolini described both the enthusiasm and the disappointments of that period:

It was a moment of great expense but also of great reflection for a structure that from an administrative and managerial point of view was approaching the threshold of the twenty-first century unprepared, outdated, and unable to provide responses in terms not only of efficiency but also and especially of justice and transparency.

Other more ambitious modernization projects would soon follow. In April 2008, during the papacy of Benedict XVI, Tarcisio Bertone initiated Project One (P1), which is still active today. The objective was to build a single digital platform for financial and administrative data: a system, in other words, that would provide one standardized accounting and management system for all the Vatican departments. Thanks to Project One, for example, the ticket office of the Vatican museums is completely online today.