Why Does the Vatican Need a Bank and What’s With the History of Scandal?

The Vatican Bank’s history reads more like Dan Brown than the financial pages, but its worst — and weirdest — days may be behind it. After a year of reorganization and reform that saw a 97 percent drop in profits, the Holy See installed a new set of overseers that includes a man who made his reputation closing down North Korea’s illicit bank accounts.

But what is the Vatican Bank and why do the Catholic Church and its 1.2 billion adherents need their own financial institution? Officially dubbed the Institute for Works of Religion (IOR) and founded in 1942, the bank’s history has been defined by scandal, secrecy, and noncompliance with the West’s standard anti-fraud measures. In fact, calling the IOR a bank may be stretching the term. It doesn’t issue checkbooks or make loans, there are strict criteria and background checks for clients, and some of its clients-only ATMs have a Latin option.

In reality, the IOR acts more like a discrete "offshore" institution for holding funds than it does a typical bank — in fact, in 2012, officials eschewed the "bank" title. Carlo Marroni of Il Sole 24 Ore, an Italian financial daily, has written that the bank mostly invests its nearly 8 billion euros in currency and bond markets — and lots and lots of gold. When the bank’s reported profit dropped by more than 80 million euros from 2012 to 2013, 16.4 million of that reduction was "tied to writedowns and fluctuations in the value of the IOR’s gold reserves."

Pope Francis has made reforming the bank one of his top priorities, and the bank is in now in full cleanup mode. When logging on to the IOR website, visitors are greeted with a message that reads like an admission of guilt and apology. "The IOR is engaged in a process of comprehensive reform, to foster the most rigorous professional and compliance standards," the letter says. "We are conducting an extensive evaluation of all our clients’ accounts, with the aim of closing down those relationships that are not in line with the IOR’s mission."

Along with naming French businessman Jean-Baptiste de Franssu as the bank’s new head, the Vatican announced Wednesday that it shuttered some 2,000 of its 19,000 accounts.* Well-compensated compliance consultants have been combing through the bank’s accounts to clean up inadequate documentation and demystify who controls the accounts.

The IOR was most notoriously linked to criminal activity in 1982 through its ties with the Banco Ambrosiano scandal. Endorsed by the Vatican, Banco Ambrosiano, an Italian bank, collapsed under $1.2 billion in unsecured loans, and the body of its chairman, once known as "God’s Banker," was found hanging from a bridge in London. The New York Times wrote at the time of "unverifiable reports that organized-crime figures and a recently discovered, anti-Government secret Masonic lodge are somehow involved." The Vatican never admitted wrongdoing, but two years later paid the bank’s account holders $240 million.

After subsequent scandals and under pressure from its partner institutions to comply with efforts to combat money laundering, the IOR began trying to reform itself in the mid-2000s. After appointing a new director in December 2009 with hopes of getting a stamp of approval from the Financial Action Task Force, a global body that sets standards for combating money laundering, the bank signed on with European Union anti-laundering rules, promising to comply by the end of 2010.

Before that could happen, the Italian government in September 2010 froze nearly 23 million euros in IOR assets in connection to a money-laundering investigation. Court documents alleged the Vatican Bank acted "with the aim of hiding the ownership, destination, and origin of the capital." In response, then-Pope Benedict created the Financial Information Authority (FIA) within the Vatican to oversee compliance and agreed to follow FATF standards to deter laundering. Like the Ambrosiano case, the Vatican denied wrongdoing and avoided criminal charges, but the allegations remain an oft-cited scar against the bank’s credibility.

The IOR’s headaches of late have been one after the other. The U.S. State Department in 2012 named the Vatican a nation "of concern" for money laundering. The bank refused to explain to JPMorgan Chase why, over the course of 18 months, 1.8 billion euros entered and left one account. One of the reformers brought in to lead the bank left fearing for his life, telling Reuters, "I have paid the price for transparency." The bank was found in July 2012 to have failed to meet seven of 16 anti-laundering recommendations by an FATF committee. The five members who make up the FIA and supervise the Vatican’s financial dealings were supposed to serve until 2016, but resigned early at Pope Francis’s request and have been replaced with outside experts, including Juan Zarate, who is best known for helping the second Bush administration develop a slew of innovative ways to apply sanctions on rogue states and terror groups. Cleaning up the Vatican’s bank may, surprisingly, prove to be nearly as challenging.

Correction, July 11, 2014: An earlier version of this article misspelled the name of French businessman Jean-Baptiste de Franssu. (Return to reading.)