A Vatican Observer Vatican finances, what is going on? The Malta case

May 19, 2020

Attorneys for a Maltese business venture involved in a legal dispute say the so-called Vatican bank's new management care more about sullying the good names of the old management, than they do about doing good business.

That is a serious accusation. The lawyers representing Futura, an investment company with which the Institute for Religious Works had started a deal shortly before the sensational renunciation of Benedict XVI, say the IOR has no interest in maintaining its reputation or defending its investments.

Instead, they say the current IOR management are out to cast the previous management in a bad light. The accusation comes directly from Futura's lawyers.

After Pope Francis' election, everything has changed in the IOR. The Malta trial is only one episode, albeit a revealing one – and this is also the thesis of Futura's lawyers – especially when it comes to the disputes being played out within the Vatican financial institutions.

The latest meeting of the heads of dicasteries saw the Vatican big wigs take up – again - the idea of a central fund: a topic already widely discussed in the past. How this fund will be structured – if it will be structured at all – remains to be seen. . Times are bad for Vatican finances, indeed, and as the general worldwide economic outlook continues to be grim, the Vatican's straits will only become more dire.

The Malta case

On April 4, Maltese media reported that the Maltese Civil Court had ordered the seizure of €29.5 million from the Institute for Religious Works. It was the latest development in a saga that began in 2013, when the IOR took on an investment obligation with which it then failed to comply, and sued the companies in Malta with which the IOR had entered into the deal.

The seizure of the IOR money was the result of a counter-complaint made by the companies involved, which accused the IOR of blocking a sale of shares. Practically speaking, they accused the IOR of interfering in the repayment of a debt. .

The way the story has unfolded shows how the Institute for Religious Works has managed investments from 2013 to the present.

The investment over which the dispute in Malta arose, was one of the last ordered during Benedict XVI's pontificate. Subsequently, the top management of the Vatican financial institution changed. The new management adopted a new investment policy.

Many of the previous financial transactions have been canceled, sometimes at the expense of substantial penalties, other times incurring unpleasant situations such as that of Malta.

The IOR transferred funds and said it did to resort to ethical investments. The general impression is, instead, the IOR wanted to cut the past. Was the IOR's past so dark, by the way?

The complaint against the IOR came from two companies based in Malta: Futura Investment Management Ltd., which manages the Futura collective investment scheme. They are both affiliated with the Optimum fund. Cougar, another of the actors, is a Luxembourg company that has a majority in the Hungarian company "Tozsdepalota Ingatlanforgalmazo es Fejleszto Korlatolt Felelossegu Tarsasag" – TIFKFT.

In April 2012, the IOR asked Optimum to "host" the IOR's Ad Maiora fund. Ad Maiora was a fund of funds, which the IOR used to manage and coordinate a series of investments made with the authorization of the Board of Superintendence.

The IOR allegedly failed to invest in the deal, and the €29.5 million seized by Maltese authorities appears to be the amount of the loss. According to the Institute, the committee that led to the investment was deceived by Alberto Matta and Girolamo Stabile, directors of Futura Investment Management, and by Optimum.

In 2013, the IOR had decided to invest €41The operation foresaw that the Futura K fund would buy a non-performing loan from the owner of the building of the former Hungarian stock exchange. For those unfamiliar with financial jargon, a non-performing loan is a loan to a debtor with a high insolvency solution. For this reason, the collection of credit is uncertain.

That loan was then converted back to 86 percent of shares in the Hungarian company that was renovating the estate.

The IOR initially participated with €17 million and an undertaking to contribute to the renovation of the building (valued by a qualified appraisal at the end of 2012 for 40 million) and therefore participated in the profits.

In May 2013, the IOR Board of Superintendence decided to close Ad Maiora and manage directly the funds it comprised. In October 2013, the new IOR general director Rolando Marranci decided that the IOR would pay off the K fund with 24 million (17 initials + 24 remaining for a total of 41) would then have managed the operation himself. But the K Fund never received the promised money and asked the IOR to fulfill its undertakings. At that point, the IOR sued the K fund, asking to get back the €17 million.

According to the IOR, Futura had made a profit of €11.6 million by first tricking the Vatican into the price and then planning to sell 90 percent of the future shares it held in the company that was renovating the the stock exchange to the Cougar Real Estate in Luxembourg. This was, in turn, owned by a Dubai company.

The Vatican's accusation is that Cougar was used to acquire the €20.4 million loan, bringing the remaining €11.6 million into the coffers of Holdabco and Alpininvestissements, two other minority shareholders. "It is clear," the IOR's attorney said, "that the IOR has been abusively caught in a threatening network of suspicious intrigues and transactions."

On November 23, 2019, the IOR learned that Indotek Group Hungary was about to acquire Cougar. The IOR complained that neither Cougar nor Futura provided the IOR with any notification of the transaction, which would have led to the sale of the investment.

For its part, Futura sued the IOR, accusing the Vatican outfit of having committed to investing €41 million, but only putting in  €17 million. The IOR would, therefore, be bound to invest the remaining €24 million, as documented in Futura's commitment letter signed by Director Marranci.

The position of the lawyers of Futura and Optimum was detailed in a reply the sent to the Times of Malta on December 14, 2019, following an article about the case.

(Column continues below)

The lawyers say, "Despite IOR's allegations about a lack of transparency, the details of the transaction were indicated by our clients to IOR before the execution of the investment." 

Futura claims that the IOR and its investment committee had been offered the opportunity to invest €20.4 million directly in a non-performing loan or to wait for the sell out of the building to run its course to recover the full amount of the loan eventually.

"This was a risky and reputationally problematic instrument," the IOR, the lawyers continued, so they decided not to invest in the non-performing loan. "since it deemed that 

Instead, the IOR preferred to acquire the asset once it was cleared of risk, that is, when bankruptcy had been deactivated, and then to invest in a cleaned-up asset.

This choice, the lawyers argue, required third parties, and, naturally, the price of the asset without debt is much higher than the non-performing loan.

According to the Maltese lawyers, "[T]he truth is that IOR defaulted on its undisputable contractual obligations and has been trying in every possible way to find legal ground in order to avoid the inevitable and severe consequences of this."

The lawyers also pointed the finger at the new IOR's management. They underscored that, after the unexpected renunciation of Benedict XVI, the Institute had experienced a series of changes, with the change of two presidents of the Board of Superintendence from 2013 to today, two general directors and most senior officials, as well as many members of the Cardinals' commission.

"New management launched a scathing critique of the previous management of the Institute and, particularly, the former DG Paolo Cipriani and his deputy Massimo Tulli, against whom the IOR has brought legal proceedings before the Vatican Tribunal and in Italy," the Futura and Optimum lawyers wrote.

It is worth mentioning that a Vatican court has sentenced Cipriani and Tulli for mismanagement, and the appeal process is ongoing.

The first instance sentence is, however, food for thought. The financial operations of the Institute of Religious Works had also been praised in the first report of MONEYVAL, released in 2012. The same report said that the review of customers had already been started.

Cipriani and Tulli resigned in July 2013, to allow the Institute to better defend itself in a process involving an APSA Vatican official. After their resignation, the IOR hired the Promontory Financial Group's highly expensive external consultants, who completed a review already underway and well advanced.

There is more.

The last balance sheet signed by the old IOR management, referring to 2012, bore assets of 86.6 million euros, a figure that has not been reached anymore.

Many investments have been abandoned. Still, the IOR's investment procedures required each transaction to be examined by the Investment Committee, where the chairman of the Board of Superintendence sometimes sat.

So if the operations were all in surplus, how can the two IOR executives be accused of bad management? And if the higher authorities scrutinized every activity, how could responsibility for any mismanagement fall solely on the two former executives?

The statements of Futura's lawyers thus risk shedding light on the fact that the IOR was unable to maintain the investments of the previous management and that divesting them caused significant damage to several different interests, including the IOR's own.

Everything will have to be demonstrated with the process, but this is indeed the impression one gets from it.

Futura's lawyers went even heavier. "The Institute's real goal," they wrote, "is not to protect its investment. On the contrary, our client contends that, through its actions, not least its refusal to honour a €24 million residual capital commitment pivotal in the development of this major real estate project, IOR is consciously putting the Hungarian investment at risk, to strengthen its allegations of mismanagement against Cipriani and Tulli."

They concluded: "It is, to say the least, unfortunate, that our clients have ended up in the crossfire between various factions within IOR, with the Institute blithely unconcerned about the reputation of our clients, the success of its investment and the rights of other third-party investors in the same project, which have nothing to do with the ongoing dispute! [sic]" 

These disputes play into and out of  two other cases, which we will also scrutinize in this series of three pieces on Vatican finances.

One of the other cases  is the purchase by the Vatican Secretariat of State of a prestigious property on Sloane Avenue in London. This purchase is at the center of a dispute that led to the suspension of five Vatican officials: four of them formerly in Secretariat of State, and one of them at the Financial Intelligence Authority. All of them were removed from their positions  without any formal charges ever being brought against any of them, and indeed before the investigations were even finished.

This is a dispute that goes beyond the Institute for Works of Religion and is not only a financial scandal but also an institutional problem.

The third case is the discussions around the Vatican investments, which are closely connected with the Malta and Sloane Avenue issues.

The Malta, Sloane Avenue, and general administrative matters all point to a single, central issue, which has become even more pressing today in times of economic crisis due to the coronavirus: how does the Vatican support itself?

1 – continue

(first of a series of 3 pieces on the Vatican financial situation)