Vatican bank arrests mark new hard line

The developing financial scandal is part of a wider church struggle

The timing was neat. Just two days after Pope Francis set up a commission to investigate the Vatican bank, known in Italian by the  acronym IOR, meaning Institute for Religious Works, a high-ranking priest who worked for it, Monsignor Nunzio Scarano, was arrested in Rome along with two other men and accused of corruption.

Father Scarano, ordained aged 35 after a first career as a banker and now in custody, had already been suspended on suspicion of involvement in money laundering. In the new case, it is alleged that the three men tried to smuggle €20m into Italy from Switzerland, presumably to avoid paying Italian duty on it.

The priest is known to his friends as "Monsignor 500" because of the number of €500 bills he carries around. In the earlier case, which is still under investigation, he is said to have withdrawn €560,000 from his IOR account to pay off a mortgage on his home in Salerno, south of Naples. The money, it is charged, consisted of donations by churchgoers who believed it was going towards building a home for the terminally ill. It is alleged the monsignor gave 56 friends €10,000 each in cash, asking them for cheques or money transfers in exchange, thus enabling him to pay the cheques into his personal Italian account. Father Scarano's lawyer has said that he declares himself "absolutely innocent". The home for the terminally ill, meanwhile, remains unbuilt.

The case throws garish light on an institution long regarded as a symbol of the byzantine corruption of the Vatican. Set up by Pope Pius XII in 1942, it was implicated in the tangled 1970s scandal of the bankrupt Banco Ambrosiano, in which the IOR was the major shareholder and whose boss Roberto Calvi was found hanged under London's Blackfriars Bridge, having been killed, probably, by the Sicilian Mafia. More recently, it has come under EU scrutiny on suspicion of being widely used as a tax haven in the heart of Europe. In 2010, Roman magistrates froze $33m held by the IOR in an Italian bank, charging that transparency protocols had been violated. The Vatican denied the charges.

Pope Francis set up the five-person pontifical commission last week "to ensure that the bank's activities are in harmony with the mission of the universal church and the Apostolic See", the Vatican announced last week. Its job was "to collect information on the running" of the IOR.

The tough intention behind the gentle language is clear in the formation of the commission, which includes the Harvard law professor Mary Ann Glendon and another American, Monsignor Peter Wells, a top official in the Vatican's Secretariat of State. The choices, said one Italian Vatican watcher, were "inspired by Anglo-American pragmatism".

Last month Ernst von Freyberg, the German industrialist chosen recently by Pope Benedict XVI as the bank's president, said he was surprised to find so few problems in the way the bank operated; the biggest, he claimed, was its reputation. Pope Francis has not removed Mr Von Freyberg but neither has he met with him; the appointment of the commission suggests scepticism about the banker's complacent remarks – scepticism that the recent arrests appear to vindicate.

The setting up of the commission is among the first signs of where the Argentine pope intends to take the vast organisation he heads. In holding the bank up to scrutiny, he is doubtless aware of the size of the challenge that he has taken on.

For more than 35 years, the Catholic church has been ruled by two popes who largely left the Vatican's bureaucrats to their own devices. Both were preoccupied by weightier matters: Pope John Paul II by his hectic schedule of apostolic journeys and his life in the media spotlight, Pope Benedict XVI by his mission to restore old-fashioned values. Neither was sufficiently interested in cleansing the Augean stables in which they lived and worked, nor, as non-Italians, were they in a strong position to do so. The last pope, in particular, as revealed in the private letters leaked by his former butler, was impotent to impose his will on an organisation dominated by more forceful and politically agile figures, notably his secretary of state, Tarcisio Bertone. His efforts to restore financial sanity to the Vatican appear to have been deliberately subverted.

Pope Francis, of course, is not Italian either but, as the child of Italian emigrés, he is completely at home in the tongue and the culture. By taking the name of the friar of Assisi, he signalled the importance to him of identifying with the poor. Concretely, this has involved spurning the luxurious fripperies and regal prerogatives of his post. After his election he insisted on travelling back to his accommodation not in a papal limousine but in the shuttle bus with the other cardinals; and since then he has declined to move into the lavish papal apartment, sleeping and eating instead in the Casa Santa Marta hostel inside Vatican City, alongside other priests.

From the moment he first opened his mouth after his election, greeting the crowd in the piazza with a homely "Buona sera", he has projected the image of a parish priest who just happens to have a billion parishioners. And his simplicity and directness – plunging into the St Peter's crowd, for example, to greet a mob of Harley-Davidson-riding bikers – have evoked a surge of enthusiasm from the faithful. "The honeymoon isn't over yet," Massimo Franco put it in Corriere della Sera: 100 days into his papacy, his approval rating in Italy stands at a healthy 85 per cent.

Pope Francis has already signalled his unhappiness at the links between high finance and the church, remarking that "St Peter didn't have a bank account". Getting to grips with decay and corruption inside the Vatican is at the heart of the Pope's mandate. As the Vatican observer John Allen put it last week, "Everyone knows that the cardinals who propelled a Latin American outsider to the papacy in just five ballots were acutely frustrated with what they saw as a breakdown in Vatican management." The commission to investigate the bank is the first sign that Pope Francis means business.

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