S.MALL EUROPEAN Enclaves have been a major headache for financial regulators in the past. Two of them, San Marino and the Vatican, will be visited in the last days of September by inspectors from Moneyval, the organization for combating money laundering and terrorist financing in Europe. You will arrive at a delicate moment. From next spring the European Union (EU) plans to pour about EUR 209 billion (USD 245 billion) into Italy to recover from the Covid-19 pandemic. Even taking inflation and economic growth into account, this is more than what was invested in the country by the postwar Marshall Plan.
Much of that EU Cash will flow to the poorer south of Italy. But this is where Italy’s mafias can most easily control funds and contracts. Having two under-regulated mini-states on their doorstep would provide them with an easy way to launder their profits. On a recent visit to Rome, Catherine De Bolle, Europol’s Executive Director, warned that her organization had seen an increase in organized crime penetration into the European economy and asked EU States particularly vigilant regarding the recovery funds.
As Moneyval clarified in its last report in 2015, San Marino has made significant strides in installing a robust anti-money laundering system. The Holy See looks more troubled, however, despite Pope Francis’ intention to overhaul his messy finances. Two controversies are swirling. The first has to do with the Vatican Bank, actually known as the Institute for Religious Works (IOR), a city-state lender. The second concerns a judicial investigation into the affairs of the Roman Curia, the central administration of the Catholic Church, the effects of which have had an impact abroad.
The inspectors had hoped that the Vatican Bank would no longer be a problem. In a 2017 report on the Holy See, Moneyval concluded that its anti-money laundering practices are “well established”. Still those IOR is now embroiled in legal battles that ironically emerged from the purge.
In March, a Maltese court ordered three companies involved in a dispute with the bank to seize assets worth EUR 29.5 million – more than three quarters of that IORThe two Malta-based investment companies and a Luxembourg-based subsidiary claim that following a change in management, the IOR renounced the commitment to invest EUR 33 million in the purchase and development of the building that once housed the Budapest Stock Exchange. (The IOR alleges that the deal was modified in a way that affected its interests and claims to losses and lost profits of up to € 25.2 million.)
Another controversy concerns the Curia. Several Vatican officials, clergy and laypeople, are under investigation by city-state prosecutors in connection with the purchase of a building in London that was partly funded by donations from the faithful. Prosecutors are reportedly considering bringing charges that may include extortion. In October 2019, Vatican gendarmes raided the offices of the department that had bought the property: the State Secretariat, the pre-eminent branch of the Vatican bureaucracy that unites the roles of prime minister and the foreign ministry.
Most damaging to the Vatican’s international credibility, the Holy See’s own regulator was raided in connection with the case and its director, Tommaso Di Ruzza, was investigated. Why remains unclear; No charges have been brought against any of the suspects since then. The Vatican Regulatory Authority, now known as the Regulatory and Financial Information Authority, combines the roles of the bank custodian and the financial information department (FIU). Documents and data seized by the police contained confidential information that was alien FIUs had sent to the Vatican. The Egmont Group, a network of most of the world’s countries FIUs immediately banned the Vatican regulator from its information-sharing mechanism and only reinstated it after the agency signed a contract with prosecutors to prevent similar episodes from occurring in the future.
The raid appeared to violate an established norm: that FIUs should be free to choose which cases of suspected financial jiggery pokery to bring to court. Coincidentally or not, on July 14th in Germany FIU in Cologne was searched by order of public prosecutors who suspected that their employees had not referred the alleged money laundering in the amount of around 1.7 million euros for prosecution.
It remains to be proven whether the complex transactions related to the London real estate business were violated. However, the matter highlights a key problem. The Curia has a state fund, the administration of the legacy of the Apostolic See, through which the Vatican’s investments are expected to be directed. However, there are many departments jealously guarding substantial pots of money that are either undeclared or unquantified.
Cardinal George Pell, the first head of the Vatican’s “Treasury”, the Secretariat for Economic Affairs, announced in 2014 that he had found “hundreds of millions of euros … hidden” 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 “no one can know exactly what is going on in general”. Moneyval’s inspectors need to find out how much, if anything, the situation has changed since then – an all-powerful task. ■
This article appeared in the Finance & Economics section of the print edition under the heading “A Holy Mess”.