Merchants in the Temple (12 page)

But the system was already outdated at the start, and risked turning into a significant but idle investment.
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It failed to link the various dicasteries of the Holy See, from the Prefecture to APSA, the IOR, and the Secretariat of State. The goal of this exorbitantly expensive computer system was to provide a comprehensive picture of the administration of the Holy See, but not everyone was interested in a comprehensive vision, and there were those who sought to obstruct it, as the COSEA Commission found when it took up the situation of the Governorate.

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The Governorate is the executive authority of the Vatican State. An organization with 1,900 employees, “it oversees general accounting procedures, the keeping of account books, the management of the State treasury and the preparation of budgets and financial statements, as well as audits,” according to the Vatican website. The Governorate manages and coordinates all the activities involved in the running of the State, including commercial and cultural activities, building maintenance, contracts, motor vehicles, and procurement of energy and telephones, tobacco and office computers. The structures that provide the largest cash flow to the Vatican—through the revenue from the shops, museums, and other commercial activities—are also controlled by the Governorate. Very few people are aware of this vast commercial network within the Vatican, which also boasts a supermarket, two of the seven Vatican-owned gas stations, a clothing store, a perfume shop, a tobacconist, and a store that sells consumer electronics.
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Already in 2009–2010, a confidential analysis by McKinsey into the Governorate's books uncovered a disastrous situation. For various expense items, such as maintenance, the Vatican was paying as much as 200–400% more than the going market rates. The President of the Governorate, Cardinal Giovanni Lojolo, asked the banker Ettore Gotti Tedeschi to help him straighten out the finances. Gotti Tedeschi requested the financial statements of the discastery and received pro bono consultancy from McKinsey. The data he found was alarming—the Governorate was hemorrhaging money—and it was brought to the attention of Monsignor Viganò, whom Benedict XVI had appointed as part of his clean-up effort. Viganò got right down to work, but as soon as his investigation started to delve into the interests of companies and groups that were well-ensconced in the Vatican, he was subjected to a smear campaign in the media that convinced Ratzinger to transfer him to Washington. And at the Governorate it was back to business as usual for years to come.

The Governorate manages substantial sums of money, and the auditors were hard pressed to examine its many transactions, contracts, and inventory in the short time available. For the sake of swift and effective action, they brought in strategic analysts of Ernst & Young Spain—they were the only firm with the requisite expertise in this area—despite previous problems with the Italian branch of the corporation. On November 12 and 13, 2013, a team of twelve strategic analysts held a marathon meeting in Madrid. A few days later they moved to Rome to get started with their audit of all the financial reports, accounts, and affairs at the financial heart of the Vatican State.
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A fourth task force was thus formed to audit the Governorate, joining the commissions already established to examine the Vatican bank, the Peter's Pence, and the Congregation for the Causes of Saints.

The auditors began to comb through the accounting books, department by department and office by office. They started with stock counts, to try to understand whether the warehouses actually had the merchandise indicated in the balance sheets. The results of their inquest were unbelievable. According to the confidential report to the cardinals, “No items were found during the stocktaking.”
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There was no trace of many goods that appeared, instead, in the balance sheets. This alarming situation applied to almost all of the Vatican's commercial activities. The report went on to say that, “During the past two years, there have been 1.6 million euros in losses, on the basis of warehouse discrepancies.”

What had happened to the merchandise? Had it been simply miscounted during the inventory? Or had someone removed items from the warehouses? If so, this might mean that there was a black market where the stolen goods were sold. An even more troubling theory was circulating at the Vatican. Some people wondered whether the goods had ever been in the warehouses in the first place. The possibility of a simple counting error was immediately excluded. The inventory was checked and double-checked, and the results always matched the findings of the initial analysis. In particular, among the “losses due to inventory differences,” according to the COSEA report to which I had access, there was a gap of 700,000 euros at the supermarket, a 500,000 euros at the clothing warehouses, 300,000 at the pharmacy, and 100,000 at the tobacconist. Discrepancies were found at all the various commercial activities. A total of 1.6 million euros had mysteriously vanished into thin air. Either that or a fake inventory had been drawn up for goods that were never actually purchased.

The task force then widened its net to include the items sold at the many museum shops, such as gadgets, souvenirs, and books. Once again they found many, many discrepancies. According to their count, some ten thousand illustrated volumes were missing, and couldn't be found in the shops, the warehouse, or the offices. The books were for the most part guidebooks to the art on display at the Vatican museums and in St. Peter's basilica. The experts on the Commission wondered whether the books had been stolen by a dishonest employee or if their absence pointed to even more serious crimes—in particular, to massive financial fraud.

A Tax Haven

The concerns of the experts stemmed from unique features of the Holy See. To make purchases outside the Vatican, the Governorate issues a little-known “personal exemption from sales tax.” This document allows Vatican citizens and employees to buy “goods and services” at steep discounts because they do not have to pay a Value Added Tax, the sales tax that exists in 63 countries of the world. But to make these duty-free purchases, the goods or services must be used “within the Vatican state or by Vatican residents.”

This tax exemption can also lend itself to fraud. Some people might claim to be buying goods at wholesale prices for the Vatican (tax free) in order to sell them at retail prices outside the Vatican, thereby pocketing sums that normally go to the tax authorities. This might explain the missing ten thousand books, but it might also represent a much more widespread practice, as a simple example illustrates. A gentleman with a “personal exemption” buys twenty computers wholesale that he claims will be used in Vatican offices, and so he doesn't have to pay sales tax. Once he has purchased the items, rather than deliver them to the Vatican he turns around and sells them at full price in Italy or another European Union country, pocketing the 20 percent sales tax for himself, an act of fraud. There are suspicions that some individuals at the Vatican take further advantage, making these purchases only on paper.

The Pontifical Commission of Inquiry saw more than one danger here. “An individual could purchase the products”—according to the report to the cardinals—“and either use them outside the Vatican or even sell them in Italy without supervision, posing a significant risk to the reputation of the Holy See.”
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If the public were to discover this tax evasion one day, it would be extremely damaging to the Vatican's image, but not “financially” damaging, of course, as the consultants working for the Commission wrote.

The fact that the report did not point to specific cases was no cause for optimism. On the contrary, this manner of buying and selling was taking place at the Vatican “without oversight,” as the Commission rightly noted. If there was no oversight, then it would be impossible to detect the illegal trafficking. And there were other suspicious dealings involving currency exchanges between Italy and the Vatican. In 2012, the Vatican registered 598 declarations of currency coming in and 1,782 declarations of currency going out, to Italy. During the same period, at the RomaUno customs office the parties involved presented only 13 declarations of incoming currency at the Vatican and 4 declarations for outgoing currency. These numbers warned of a massive tax evasion.

To continue down the road of no oversight could cause irreparable harm to the Vatican. The Commission indicated forcefully that the only “road to pursue”—according to the document in my possession—“is to improve the tax policies in order to minimize the risk related to the Vatican's tax haven status quo.”
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In other words, as long as the Vatican City remains duty-free, it will always be seen as a possible tax haven. As was observed by the deputy prosecutor of Rome, Nello Rossi—who has run various investigations involving the IOR—there is no Italian customs office and not even the blandest form of control over what is imported into the Vatican. The closest customs office is probably the one at Fiumicino airport.

The introduction of “appropriate oversight measures on the issuing of tax exemptions,” was considered an urgent matter. The Commission had to ascertain who the beneficiaries were, what purchases were being made, and where the items were actually consumed or used. There was talk of a historic upheaval. For the first time in the history of the Holy See, the introduction of a system of taxation was contemplated. Reform of the sales tax had become an urgent matter, and it was imperative “to consider introducing a tax on commercial sales,” a watershed development.

The Curia responded to the proposal with little enthusiasm, if not outright contempt. To initiate systematic controls over the tax-free status and introduce a sales tax at the Vatican shops would of course negatively impact the beneficiaries of these questionable earnings. Francis was now making new enemies inside the Apostolic Palaces who were working behind the scenes to impede the Commission's work and thwart its goals. For the moment, any thoughts on the matter were relegated to the back burner.

The “road map” indicated to the cardinals by the Commission was not followed. After I saw the documents and reconstructed the Commission's initiatives, I had to ask myself the inevitable question: will the Pope have the strength to create a financial police force in the Vatican and to introduce a system of taxation on merchandise? Or is the Vatican destined to remain a kind of “offshore” state with no system of taxation?

The irregularities in the Vatican's commercial activities are many and obvious. The Holy See appears to be brimming with shopaholics. Bishops and cardinals seem to have an overweening passion for the latest televisions and electronic gadgets. The anomaly did not escape the notice of the RB Audit Italia experts, who had prepared an informal preliminary report on October 9, 2013. The numbers speak for themselves.

“It is odd,” wrote the consultant Salvatore Colitta, “that in the consumer electronics sector there should be a sales volume of more than 4.8 million euros from a single supplier, and a local one, at that.” Why was there such a high volume from a single supplier? It would be better to stipulate “agreements directly with the manufacturers,” the report goes on to say, “which would allow more convenient purchasing conditions and consequently more competitive sales prices and better profit margins.”

To make matters worse, it was also discovered that the Vatican stores, which offer merchandise at cut-rate prices, were filled with customers who were not always entitled to shop there. Customers are supposed to have a special “buyer's card” legally reserved for employees and inhabitants of the small state. The Vatican has 5,000 employees (many of them Italian citizens) and barely 836 inhabitants, which means that there should be about 6,000 buyer's cards altogether. But the number of active buyer's cards was actually much higher: 41,000 cards for as many customers, almost seven times the number of people who were entitled to them.

At the Vatican it was an open secret that almost none of the customers met the requirements, but no one was complaining. The customers purchased items at reduced prices, the shop employees had a steady sales volume, and the Governorate was reaping huge profits. The revenue for 2012 was 44.5 million euros: 15.3 million from the shops, 13.1 from fuel, 7.8 million from the sale of clothing, 4.8 million from electronics, and 3.5 million from the tobacconists. The analysts of Ernst & Young Spain found even more anomalies and petty favoritisms and listed them in a document that I was able to examine:

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Supermarket: negative margin (revenue up by 9% but costs up by 17%); more than 17,00 products on a 900 m
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sales floor (reference point is about 10,000 products per 1,000 m
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).

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Fuel: 27,000 persons bought gas, and 550 of them exceeded the limit of 1,800 liters per year. 18% of sales registered to a “service card” (without specifying the cardholder's name).

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Clothing and Electronics: more than 16,000 customers; more than 22,700 products.

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Tobacco: more than 11,000 customers, 278 of whom exceeded the limit of 80 cartons/year; 14% of sales registered to a “service card” (without specifying the cardholder).

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Pharmacy and Perfume Shop: 17% drop in revenue; 30% of sales stem from fragrances and skin-care products; 1,900 customers a day.

“Close the Vatican Shops”

The auditors questioned whether these commercial activities were truly consistent with the pastoral mission of the Church and, for example, if the sale of fragrances was at odds with the spirit of the Gospel. They submitted these questions for a commercial opinion and strategic guidelines to the analysts of Ernst & Young Spain, whose conclusions can be summarized in a very clear outline. The sale of fragrances, electronics, tobacco, over-the-counter medication, and supermarket items were described as “no fit” transactions that made no real contribution to the evangelical mission and represented, in fact, a risk to the reputation and the image of the Church.