The Vatican has acknowledged that it needs to reform its bank, the Institute for the Works of Religion, but carrying out this task is not easy, given that the lender's image has been severely tarnished by a series of scandals.

Inside the medieval bastion that houses the Vatican bank, two volumes sitting on a desk illustrate how the troubled institution is responding to outside pressure to reform. An old manual on money laundering prevention, used until 2012, runs to just eight pages, while its replacement contains more than 100 pages setting out the new legal framework for compliance with international standards.

Despite progress being made in repairing the bank’s tarnished image, its future is still in doubt. Pope Francis decreed radical reforms to the Vatican’s financial system on February 24, 2014, but no decision was made over what to do with the Institute for the Works of Religion (IOR), as the bank is formally called.

“It is up to the pope to decide the future of the IOR. The principle, however, is that if you keep it, you do it in the right way. That is what is currently happening,” a senior Vatican official tells The Banker.

Countering corruption

Shutting down IOR has not been ruled out, although one of the eight cardinals on the pope’s special advisory commission has suggested it should be fixed rather than closed. A decision is expected within months.

Reforms announced by Pope Francis in his motu proprio decree are his response to entrenched inefficiency and corruption in the Curia, the Vatican’s bureaucracy, as revealed in the leaking of former Pope Benedict XVI’s documents by his butler in the 2012 'Vatileaks' scandal.

A Secretariat for the Economy has been set up, headed by Cardinal George Pell, the 72-year-old archbishop of Sydney, who will direct all economic and administrative affairs of the Vatican state. He will be assisted by a 15-member council of eight senior clerics and seven lay members “with strong professional financial experience”.

The Financial Intelligence Authority has taken on powers “to conduct audits of any agency of the Holy See and Vatican City State at any time”, while the department that managed real estate and financial holdings – the Administration of the Patrimony of the Holy See (Apsa) – has officially become the Vatican’s central bank.

Practising what it preaches

Work continues, meanwhile, at IOR to sift through its 33,000 accounts and verify its 19,000 clients while enforcing anti-money laundering norms. Ernst von Freyberg, appointed president of IOR in one of Pope Benedict’s final acts, recruited Promontory, a US consultancy firm, to carry out this task. Hundreds of accounts have been reportedly closed, though IOR declines to confirm the exact figure, saying the audit is ongoing and should be completed in mid-2014.

“Until February to March 2013 there was a state of concern about the ability of the institute to deliver services going forward. This is why we had to take action fast and in a decisive way,” says an IOR spokesman. “There was no question on costs and on when; we had to narrow the regulatory gap and set up a framework that allows us to be taken seriously.” IOR adds that the effort has been recognised internationally, leading to new correspondent bank relationships in 2013, bringing the total to 35.

Moneyval, a Council of Europe watchdog, said last December that IOR had made progress in anti-money laundering compliance and transparency since its previous report in 2012, which listed serious shortcomings. Moneyval noted that IOR had reported some 200 suspicious transactions, describing this as a “significant number”.

Last October IOR published its first annual report since its founding in 1942, revealing €6.3bn in assets.

The latest scandal to come to light connected to IOR was the arrest last June of a senior cleric working as an accountant at Apsa. Italian prosecutors accused him of trying to smuggle €20m in cash from Switzerland and using his accounts at IOR to launder millions in faked donations. The case has highlighted a new willingness of the Vatican to co-operate with the Italian authorities. IOR said in January it looks forward to a resumption of full interaction with Italian financial institutions pending review by Italian regulatory authorities.  


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