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Vatican creates financial watchdog amid bank probe

by Nicole Winfield
| December 31, 2010 8:00 PM

VATICAN CITY - The Vatican on Thursday created a financial watchdog agency and issued new laws to fight money laundering and terrorist financing in a major effort to shed its image as a tax haven that for years has been mired in secrecy and scandal.

The decrees, which go into effect April 1, were passed as the Vatican's own bank remains implicated in a money-laundering investigation that resulted in 23 million euros ($31 million) being seized and its top two officials placed under investigation.

The bank, formally known as the Institute for Religious Works, or IOR, is one of several Vatican offices that are covered by the new financial transparency rules, which were adopted primarily to comply with European Union norms. The Vatican city state's governing administration, the department that controls the pope's vast real estate holdings, even the Holy See's pharmacy, museum and TV station are covered as well.

The bank was created to manage assets placed in its care that are destined for the pope's religious or charitable works. But it also manages ATMs inside Vatican City and the pension system for the Vatican's thousands of employees.

The bank is not open to the public and its list of account-holders is secret. But bank officials say there are some 40,000-45,000 among religious congregations, clergy, Vatican officials and lay people with Vatican connections.

Pope Benedict XVI, who wrote an entire encyclical on the need for greater morality in finance, said he was issuing the decrees because he wanted the Vatican to join other countries that have cracked down on legal loopholes that have allowed criminals to exploit the financial sector.

International financial organizations, which have been working with the Vatican to help it come into compliance with their norms, said Thursday it appeared the Holy See had taken a step in the right direction.

The decree creates an independent Vatican compliance agency, the Financial Information Authority, tasked with ensuring all Vatican financial transactions comply with the new laws. The watchdog will also share information with international financial organizations, a big shift for the notoriously private Vatican financial system.

It can freeze suspect transactions for up to five days and can conduct investigations which, if warranted, can be passed onto prosecutors at the Vatican tribunal. Its work is conducted in secret - but the norms stress that secrecy won't get in the way of cooperating with law enforcement agencies.

The legislation adopted alongside the new watchdog agency is remarkable reading given that it concerns such a tiny city state - 110 acres (44 hectares) - which is the seat of the Roman Catholic Church.

It's now against the law in the Vatican to train anyone for terrorist acts or to provide them with chemical or bacteriological weapons. Punishment is stiff: five to 10 years in prison - in this case an Italian prison since the Vatican doesn't have a jail.

People in the Vatican who traffic in human beings, for prostitution or other reasons, or who traffic in human organs now face eight to 20 years behind bars. It's now even a crime to pollute the Vatican's soil, water or atmosphere: those guilty face up to a year in prison, or two and 52,000 in fines if the pollutants are particularly dangerous.

But it is the legislation directly concerning financial transparency that is key to the Vatican's efforts to comply with EU norms on money-laundering and terror financing and shed its reputation in the financial world as a secrecy-obsessed tax haven whose bank was implicated in one of Italy's largest fraud cases.

The Vatican had pledged to pass such legislation by Friday, the last day of 2010, when it entered into a monetary agreement with the EU in December 2009 concerning the issuance of euros.

The effort, though, went into high gear following the money laundering probe this past September, which greatly embarrassed the Vatican and its bank chairman, economist Ettore Gotti Tedeschi.

Rome prosecutors on Sept. 21 seized 23 million and placed Gotti Tedeschi and his deputy under investigation, alleging the bank broke the law by trying to transfer money without identifying the sender or recipient. The two men have not been charged.

The Vatican has insisted the probe resulted from a "misunderstanding" that it hoped to clarify quickly. But Rome courts have twice refused to release the money, with a judge earlier this month saying nothing had changed in the way the Vatican guards the identity of its clients.

Asked Thursday whether the bank would now identify its clients when it moves their money, Vatican spokesman the Rev. Federico Lombardi said the question of the seized account was a very particular case.

"But I maintain that this law creates a situation in which the type of problems that were verified or unsuitable are unthinkable," Lombardi said.

Gotti Tedeschi, who was named chairman of the bank last year, has said he has been working since then to get the Vatican to come into compliance with the norms of the Financial Action Task Force - the Paris-based policymaking body that helps develop anti-money laundering and anti-terror financing legislation.

The task force requires its members to pass legislation making money-laundering a crime; to establish an entity to report suspicious transactions and then investigate them; and to pass legislation requiring that the bank identify its customers properly and make that information available to law enforcement agencies.

Rick McDonell, the task force's executive secretary, said Thursday the agency hadn't had time to study the Vatican norms in detail and in English.

"However on the strength of what has been released I can say it appears to be a significant step towards compliance with the global anti-money laundering standards," he said in an e-mail to The Associated Press.

The norms also are designed to comply with EU norms on money-laundering and counterfeiting. Three of the four laws issued Thursday in fact concern the issuing of euro bank notes and coins to guard against counterfeiting and fraud.

Gotti Tedeschi has also said he wanted to get the Vatican on the Organization for Economic Cooperation and Development's "white list" of countries that share tax information to crack down on tax havens.

To do so, though, often can take years as the Vatican must enter into tax information sharing agreements with at least 12 other countries after making a formal commitment to transparency.

Lombardi said the norms issued Thursday were a first step.

Jeffrey Owens, head of tax issues at the OECD, said Thursday the Vatican's compliance with the FATF requirements "will go some way to meet the tax requirements" required of OECD white list members, but that the two issues are distinct.

He added that the OECD had not had further contact with the Vatican since two meetings were held starting in the spring of this year.

The Vatican bank was famously implicated in a scandal over the collapse of the Banco Ambrosiano in the 1980s in one of Italy's largest fraud cases.

Roberto Calvi, the head of Banco Ambrosiano, was found hanging from Blackfriars Bridge in London in 1982 in circumstances that still remain mysterious.

Banco Ambrosiano collapsed following the disappearance of $1.3 billion in loans the bank had made to several dummy companies in Latin America. The Vatican had provided letters of credit for the loans.

While denying any wrongdoing, the Vatican bank agreed to pay $250 million to Ambrosiano's creditors.

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