Vatican passes key financial transparency test

The Vatican passed a key European financial transparency test, according to a report card released Wednesday, but received poor grades for the effectiveness of its new financial watchdog agency and the ability of its bank to make sure its customers and transactions are clean.

The Council of Europe report marked a milestone in the Holy See's efforts to shed its reputation as an institution whose finances have long been mired in secrecy and scandal and move on to the so-called "white list" of countries that share financial information.

The report showed the Vatican had received compliant or largely compliant grades on nine of the 16 "key and core" internationally recognized recommendations to fight money laundering and terrorist financing. But seven other areas were found lacking, particularly concerning the Vatican's financial oversight agency, created amid much fanfare in 2010 to try to respond to international demands for greater fiscal transparency.

The 241-page report found serious problems with the agency's role as a supervisor or regulator of the Vatican's finances, giving it a failing grade. It said the agency had yet to conduct any inspections, can't sanction one of the two key Vatican financial institutions and that its role, authority and independence needed clarification.

The report said the agency's ability to share financial information with other governments was hobbled by the Vatican's insistence that it enter first into bilateral agreements.

The Holy See put the requirement in place largely because it fears Italy would make unreasonable demands for financial information from the Vatican bank, where Vatican officials, dioceses and members of religious congregations hold accounts. The Holy See wanted to make sure that if it gave such information to Italy, a reciprocity agreement would require Italy to share similar information with the Holy See.

The head of the Moneyval committee that evaluated the Vatican, John Ringguth, said the speed with which the Vatican came into compliance and the uniqueness of the Holy See as a state stood out to the inspectors: It is the world's smallest sovereign state in terms of both size (44 hectares or 110 acres) and population (595 citizens of whom 247 are residents). It is the seat of the 1.2-billion strong Roman Catholic Church and a state with financial institutions, but has no private sector.

"One of the first things that we had to get our head around was the law of 1929, which basically creates a public monopoly system in the Vatican City State and Holy See," Ringguth said in a phone interview.

Overall he said the Vatican fared well in its first-round evaluation, noting that it comes out "somewhere in the middle" of Moneyval member states in terms of rankings and netting overall a compliant or largely compliant rate of 49 percent with all the recommendations. Some of those states have had years to come into compliance, though, whereas the Vatican only began the evaluation process last year.

"They have moved very fast and been very responsive to our recommendations thus far," he said.

Monsignor Ettore Balestrero, the Vatican undersecretary of state, said the Vatican welcomed the findings and said the Holy See knew well it still had work to do.

"We take both the praise and criticism contained in the report with seriousness," he told reporters. "The report released today is not the end, but is rather an important passage of our continuing efforts to marry moral commitments to technical excellence."

The report set out several areas for improvement before the Holy See reports back in a year's time on its progress. In particular, it said the Vatican bank, embroiled 30 years ago in one of Italy's most spectacular banking collapses, should be independently supervised and should make rules about who is actually eligible to keep accounts there.

Currently, the bank is supervised by five cardinals, headed by the Vatican secretary of state. And only recently did the bank start researching its client database.

While praising the bank for having instituted customer due diligence measures before required to by law, it found they were lacking in some areas. It faulted the bank for simplifying the measures without first carrying out an assessment of the risks it faces for being used unwittingly for money laundering or terrorist financing. And it found fault with procedures to report suspicious financial transactions.

Balestrero acknowledged that the millions of dollars in cash donations the Holy See receives every year from the faithful could raise alarm bells for regulators seeking assurances that its money was clean. He said that was an area the Vatican would study in the upcoming months.

The Vatican submitted itself to the Moneyval evaluation process more than two years ago after it signed onto the 2009 EU Monetary Convention. Since then, it has written and rewritten a law criminalizing money laundering, created the financial watchdog agency and ratified three anti-crime U.N. treaties, among other measures.

Each of those moves is required by the Financial Action Task Force, the Paris-based policymaking body that helps countries develop anti-money laundering and anti-terror financing legislation. The Council of Europe's Moneyval committee rated whether the Vatican was compliant, largely compliant, partially compliant or noncompliant in each of the task force's recommendations.

Sixteen of the original 49 recommendations are considered "key and core," with a score of six or more passing grades sparing the Vatican from a more intensive review and evaluation process in the future. By coming out with a 9-7 report card, the Vatican passed the test and is solidly in the company of other countries that have been working for years to come into compliance with the FATF norms.

One area singled out for improvement was in putting into operation U.N. anti-terrorism conventions, which require the Vatican keep a list of terror suspects and show how it can freeze and confiscate terrorist assets. The Vatican scored partially compliant and noncompliant, respectively. Balestrero noted that after the reporting deadline passed, the Vatican established the terror list — and had made other changes as well since the January deadline that will be taken into account in the progress report next year.

One area where the Vatican received high marks was in international cooperation in responding to judicial requests from other countries — undermining frequent complaints from Italian prosecutors that the Holy See has ignored requests for assistance.

Pope Benedict XVI himself has said he wanted the Vatican's finances to follow international principles, saying peace in the world today is threatened by terrorism and an improper use of the global financial system.

The Vatican's efforts shot into high gear in 2010, when the then-head of the Vatican bank, known as the Institute for Religious Works, was placed under investigation for alleged money laundering by Italian prosecutors after a suspect transaction was reported by the Bank of Italy. He has not been charged and the €23 million seized from the Vatican account by Italian financial police has been returned.

At the time of the seizure, the Vatican made clear it intended to get on the so-called "white lists" of financially transparent countries of both the Financial Action Task Force and the Organization for Economic Development and Cooperation, which oversees a separate process for countries to share financial information to fight tax evasion. Balestrero was asked Wednesday whether the Vatican was still pursuing the OECD process; he said merely that the Vatican was taking a "step by step" approach and focusing now on the FATF.


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