Sunday, January 09, 2011

The Vatican Creates Financial Watchdog


Last week, the Vatican passed sweeping legislation in an attempt to meet international norms pertaining to money laundering and terrorist financing and created a financial watchdog to monitor the Institute of Religious Works (IOR), the Vatican's bank. This legislation created the Financial Information Authority, an independent Vatican compliance agency that will monitor all Vatican institutions, including its pharmacy and supermarket. Most importantly, it will monitor the Vatican's financial transactions to ensure that they comply with financial laws. The watchdog will share this information with other international financial organizations, which is a significant departure from the Vatican's previous policies that upheld a very secretive financial system. It will also have the authority to investigate and freeze suspect transactions for as many as five days and may forward its investigations on to prosecutors with the Vatican tribunal. Along with the creation of this watchdog agency the Vatican also created a large body of law to regulate its financial matters and provide for closer compliance with EU norms on money laundering and terrorist financing. The laws will also seek to catch and punish stock market violations and insider trading.

This legislation was passed largely in an effort by the Vatican to rid itself of its reputation as a secretive banking system with loose rules. The IOR is a bank based in Vatican City with no other branches. It operates as an off-shore institution, outside of EU rules. In December 2009, EU officials agreed to expand the number of euros that the Vatican is allowed to mint and circulate per an agreement between the Vatican and the Paris-based Financial Action Task Force. In response, the Vatican pledged to pass regulations that would align the city-state with EU financial norms. Rick McDonell, executive secretary of the task force, said that the legislation appears to be a "significant step towards compliance with global anti-money laundering standards." The legislation is also a result of chairman of the IOR Ettore Gotti Tedeschi's efforts to get the Vatican on the Organization for Economic Cooperation and Development's "white list" of countries that share tax information. To do so, the Vatican will have to enter into tax information agreements with at least twelve other countries and make a formal commitment to transparency.

The legislation also comes on the heels of an investigation of Gotti Tedeschi for violations of Italian anti-money-laundering laws. Prosecutors allege that the Vatican failed to disclose adequate information regarding money transfers from the Vatican's bank to an Italian bank. The Vatican has stated that the investigation is the result of a "misunderstanding" between the bank and Italian officials. Similarly, the Vatican bank was involved in a scandal in the 1980s when Bank Ambrosiano, a large private bank, collapsed following the disappearance of $1.3 billion in loans to Latin American companies. The Vatican bank had provided letters of credit for those companies, but denied any wrongdoing. Nevertheless, it paid $250 million to the bank's creditors. Banco Ambrosiano's president was later found dead, hung from a London bridge.

Discussion Question: Is the creation of this watchdog agency enough to get the Vatican in compliance with international money laundering norms? What additional steps should the Vatican take to prevent fraud?

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