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Cash and Corruption in God’s City

January 9, 2013

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

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The day before I left for my trip to Germany last month, I was warned to bring plenty of money in cash. You see, the country has transitioned to chip-and-PIN cards, which use embedded microprocessor chips for financial transactions instead of traditional magnetic stripes. The problem is that this means it’s becoming increasingly difficult for oblivious American travelers (myself included) to use their credit cards. Hence the cash. Although I could have circumvented this problem with a little foreknowledge and a call to my bank, I found this problem to be particularly irritating. After all, in this century, who carries around cash?

It is precisely this pesky problem—carrying around cash—that travelers to the Vatican are now stomaching. And in this case there aren’t any easy answers for the savvy; museums and businesses in the Holy See are declining credit and debit cards following concerns of inadequate money laundering controls. If using cash instead of electronic payments to avoid money laundering seems a bit backward to you, that’s because it is.

The Vatican, with at least a touch of irony, is no stranger to immoral and otherwise shady finances. In one of the more spectacular historical examples, in 1982 Roberto Calvi, nicknamed “God’s Banker,” and chairman of Banco Ambrosiano hanged himself. His bank had recently collapsed after a scandal involving shadowy finance. As it would turn out, the deceased Calvi wasn’t just a loyal banker for holy men.  He was also a loyal banker for the Sicilian Mafia, arms dealers in Iran, dictators in Latin America, and the Contras in Nicaragua.

Calvi exploited his influence to set up a network of offshore shell companies, which the Mafia exploited to launder the proceeds of their heroin business. Three years before his death, the Bank of Italy discovered one of Calvi’s illegal transactions and Italy opened a criminal investigation. Two years later Banco Ambrosiano found itself hundreds of millions of dollars in debt after $1.4 billion in loans the bank had made to ten shell corporations in Latin America disappeared.

Today’s problems in the Vatican aren’t as spectacularly appalling, but they are still cause for grave concern.

The financial system—both politically and practically—in the Vatican City is unusual to say the least. The primary financial institution in the Vatican City is the Institute for Works of Religion, also known as Vatican Bank. It is directed by a private CEO, but he reports to a committee of Cardinals and, ultimately, to the Pope.

The Vatican has a special status as an independent state within Italy. As part of its AML regulations, the Bank of Italy does require all foreign banks operating in Italy, including the Vatican bank, to provide information about the origins of the money they transfer. Vatican Bank also enjoys a unique physical relationship with Italy. The City is physically surrounded by Italy, but not actually in Italy, which gives it a special ability to act as a parasitic offshore entity and yet enjoy the advantages of physical proximity to a host country.

Vatican Bank is not unfamiliar with scandal. It was the major shareholder of Banco Ambrosiano, so when that bank collapsed amid scandal, Vatican Bank also came under intense scrutiny and criticism. The bank and two of its high level officials also faced money laundering allegations in 2009 and 2010 when Italian authorities discovered several suspicious transactions. In a separate and also recent case, financial police in Sicily revealed a case in which a Roman Catholic priest living in Rome, whose uncle was convicted of Mafia association, used a Vatican Bank account for money laundering.  According to investigators, the Priest’s father illegally obtained $350,000 dollars from the regional government of Sicily for a non-existent fish breeding company and then transmitted the funds to his son as a “charitable donation.”

This brings us back to last week, when the Bank of Italy refused to authorize Deutsche Bank’s Italian unit from continuing to provide electronic payment services within the Vatican. Effectively, this blocks electronic payments from occurring within the City’s walls. According to the Italian central bank, the reason for the block is (put simply) that the Vatican’s anti money laundering measures don’t meet Italy’s criteria. This means Italian banks are not authorized to operate within the Vatican.

While this action will do little to nothing to actually combat money laundering (actually it could have the opposite effect), it has served to train an international spotlight onto the Vatican’s AML measures. The Vatican, which is within walking distance for Italian mafia and corrupt officials, but out of Italy’s legal reach, provides a seamless location for criminal money and a moral obligation to do something about it. Where investigations and fines have failed, maybe Italy’s latest tack—inconvenience the visitors—will succeed.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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