The news of the law modifications have not been officially announced by the Vatican. This is not unusual, though. The changes are ultimately not going to make substantial modifications to Vatican City State law — they are merely adjustments that improve the law and make it more compliant with international standards. All countries make these sorts of adjustments periodically.

On the other hand, the news that the Bank of Italy (Italy’s central bank) has blocked all electronic payments through cash machines and by credit cards in Vatican City State has provoked a small media storm. The blocking – according to Father Federico Lombardi, director of the Holy See Press Office – was due to a “technical problem”: the supplier, i.e. Deutsche Bank Italia, did not ask for the «required authorization» to operate. Deutsche Bank Italia manages since 1997 the electronic payments circuit in Vatican City State. Back in 1997, Italian regulations against money laundering were different (based on law 197, promulgated in 1991, and updated through the decree 153/1997) and Deutsche Bank Italia likely thought that it had to guide itself by Vatican legislation, not Italian.

The inspection that lead to the blocking took place in 2010 – right when the Holy See path to gain full financial transparency began. The Bank of Italy wanted to make it clear that Deutsche Bank Italia is under Italian jurisdiction, and thus under Bank of Italy oversight. When Deutsche Bank Italia applied for the required authorization, it was denied. The reason: Italy considers Vatican City State a «not equivalent extra-communitarian country» with regards to financial and anti-money laundering oversight – as underlined by several «anonymous» and «financial circles» sources that have spoken to journalists about this issue recently.

There is still no information about when this «technical problem» will be resolved. Some sources say that everything should be ok within a week, while others maintain that more time is needed because Vatican City State is not in the Italian white list.  Italy may want to wait for the MONEYVAL fifth-round evaluation report – that will take place within the next four years – before including Vatican City State in its white list.

Anyway, all of this would hardly amount to a new Vatican financial controversy. On the contrary, the most recent changes to the anti-money laundering law (contained in the law n. CLXXXV of 2012) are another Holy See step toward full financial transparency, in view of the inclusion of the Vatican Authority for Financial Information (AIF) to the Egmont Group, the global network of Financial Intelligence Units (FIU). That the Vatican initiated the membership procedure to join the Egmont Groups is significant: it places the Holy See among reputable countries on financial transparency.

The network of FIUs is named after the «Egmont Hotel» in Brussels, where Units from all over the world gathered in 1995. The aim of the group is to have a common framework  to cooperate in combatting money laundering and the financing of terrorism, and to improve each country’s program. The AIF initiated long time ago the process to join the Egmont Group, and communicated this decision to MONEYVAL evaluators (MONEYVAL is the body of the Council of Europe that assesses if its member states are meeting international standards against money laundering and the financing of terrorism) while the MONEYVAL peer evaluation on Holy See/Vatican City State was taking place. Already in the MONEYVAL report released in July, it is clearly stated that the Holy See was considering to join the Egmont Group. «The FIA – it is written in point 30 of the report – is seriously considering joining the Egmont Group and has already taken steps to initiate the membership procedure which would enable it to cooperate directly with other FIUs in the Egmont Group in accordance with Egmont principles.»

MONEYVAL evaluators rendered a positive assessment of the Holy See’s economic/financial structure, but they also identified some areas for improvement. One such area noted that the Authority for Financial Information only had limited powers to exchange information and sign Memorandums of Understanding with other Financial Intelligence Units.

Everything changed with the law modification that the Pontifical Commission for Vatican City State – i.e. the Vatican legislator – approved on December, 14. Small changes, with a big impact. Clause 7 of article 2 of the Vatican anti-money laundering law (Vatican law n. 127) previously stated that «the Authority for Financial Information, if the State Secretariat will grant the nihil obstat, can enter into Memorandums of Understanding with comparable authorities of other countries in order to exchange information about financial transfers suspected of money laundering or of financing terrorism.» The law modification eliminated the need for a Secretariat of State’s nihil obstat. The Secretariat of State is already the body in charge of the foreign policy and the coordination of internal policy, including anti-money laundering policies.

Article 41 of the law n. 127 also changes. In its new version, it widens the range of the international exchange of information, no longer limiting it to suspect transactions only.  Instead, it is now generally oriented towards preventing and combating money laundering and the financing of terrorism.

These two changes can be considered in the end another step of the Holy See toward the building of an economical/financial structure projected for the long term. As such, it should be welcome both by MONEYVAL and by individual States – for example, Italy – that pay a lot of attention to the Vatican path to financial transparency.

One area for improvement concerned the functions of the AIF, which operates both as a Financial Intelligence Unit (FIU) and an oversight mechanism.  MONEYVAL judged AIF «not compliant» in its oversight function (Intergovernmental Financial Action Group (GAFI) recommendation 23) and «largely compliant» as a FIU (GAFI recommendation 26).  MONEYVAL recommended a clear separation of the two functions, without addressing if they can remain under a common AIF umbrella.

After the publication of the MONEYVAL report, the Holy See resumed its initiatives for greater transparency.  The goal now was to address the «not compliant» or «partially compliant» assessment with respect to specific recommendations for transparency,  and to harmonize further reforms with the GAFI’s own realignment of recommendations.  GAFI had a list of 40+9 recommendations, which the MONEYVAL evaluators used as their guide.  Recently, GAFI realigned its set of recommendations: there are now 40 recommendations, including several that are completely new – for example, recommendations that deal with financing of the proliferation of weapons of mass destruction, which also meets the Holy See commitment.  The Holy See has always been engaged in raising awareness about non proliferation issues, and is thus particularly attentive to these new recommendations.

The Holy See needed to thrust a new impetus to the AIF.  Francesco De Pasquale had been AIF’s director since its establishment.  De Pasquale is an appeals lawyer, and had 20 years of experience dealing with anti-money laundering legislation.  He is also a former Bank of Italy official.  Marcello Condemi, who drafted the first Vatican City State anti-money laundering law (law n. 127, later reformed), had also been a Bank of Italy official.  But even if there were plenty former Bank of Italy officials at the Vatican, the Bank of Italy showed some hostility towards the Vatican.  Jeffrey Lena, the Holy See lawyer and international law expert, plainly stated in an interview that the Holy See maintains cordial financial relations with all the countries, except Italy, the only country that «considers the Vatican non equivalent for what concerns anti-moneylaudering»

(Ultimately, the way in which financial relations are managed is a matter in which the very sovereignty of the Holy See is at stake.  All too often, Italy falls into treating the Holy See as if the Vatican were a multinational company on Italian territory –which is not.  History reminds us how the Holy See preferred to sign a Concordat with the dictator Mussolini rather than with the previous Italian liberal administrations, as only Mussolini was disposed to recognize the Vatican City State’s sovereignty, «that piece of land that allows us to carry out our mission,» as Pope Pius X used to say).

How was the Authority for Financial Information improved? At first, by hiring René Bruelhart as a Secretariat of State ad hoc consultant for anti-money laundering issues. Young (he is just 40) and hailing from Freiburg, Bruelhart had ran for 8 years the Lichtenstein Financial Intelligence Unit.  In 2010 he was named vice president of the Egmont Group, the FIUs global network.  Bruelhart’s experience makes him one of the most eminent international experts in the prevention of money laundering and the financing of terrorism.  His recruitment also made the anti-money laundering team at the Vatican more international.

Now, the Holy See felt it was time for a further step.  Card. Attilio Nicora, president of the AIF Board of Directors, supported the notion that it was time for a change.  This was significant, because Nicora himself was one of the most strenuous defenders of the first Vatican anti-money laundering law.  The law had been later reformed, following the first on site visit of MONEYVAL evaluators (who felt very strongly about the need for this reform).  Nicora, however, referred to the reform as «a step backwards».  But Nicora held a position subject to «conflict of interests», as the MONEYVAL report points out, even if Nicora was never explicitly mentioned.  Paragraph 797 of the Report mentions a «serious conflict of interests» for a cardinal that is a member of the IOR Cardinals’ Commission and, at the same time, president of the AIF Board of Directors.  The report did not question Nicora’s personal performance.  Rather, it merely underscored incompatibility among these two responsibilities.

In fact, Nicora’s remaining on board is not at stake, even though he has reached retirement age.  Because Nicora understood that a change was needed, he named René Bruelhart director of the AIF, to make the authority increasingly more independent and international (even inside the Vatican, the board of the AIF was considered disproportionately Italian, compared with the relatively international Holy See personnel).  Francesco De Pasquale was promoted to member of the AIF Board of Directors (AIF Board of Directors members are named by the Pope).  This choice would indicate that De Pasquale had never lost the confidence of  the Secretariat State or the AIF.  Notwithstanding lively internal debates –De Pasquale was also a strong supporter of the first anti-money laundering law– the contribution of the now ex AIF Director was crucial during the first year of the AIF and during these past recent months. When the MONEYVAL report was then published, the Holy See vigorously undertook the commitment to achieve full financial transparency.

What will be De Pasquale’s new responsibilities? The AIF statutes note that AIF Board members must «program, manage and control the Authority’s activity.»  Thus, De Pasquale will be able to contribute his experience to the Vatican’s path to full financial transparency.

At the same time, the appointment of Bruelhart as new director of the AIF may be considered a first step toward the reforms in the Authority recommended by MONEYVAL, and certainly the first of the steps needed to strengthen the AIF’s internal structure.