The Vatican financial mess Pope Francis couldn’t fix

For over a decade, Francis had struggled to bring some transparency to the Vatican’s shadowy balance sheet. Now, in the final weeks of his life, advisers were filtering in and out of his austere reception room, presenting the details of a microstate awash in priceless treasures but tumbling deeper into debt. The budget deficit had tripled since the Argentine took office, and the pension fund faced up to 2 billion euros in liabilities it wouldn’t be able to fund.

The first Jesuit Pope was exhorting clergy to live frugally—but pinching pennies alone would not relieve the financial crisis facing the seat of the Church. The Vatican was increasingly relying on museum ticket sales to fund its civil service, its worldwide network of embassies and the Papal Swiss Guard, a small army paid in Swiss francs. The city-state serves seven million visitors a year and a global flock, without collecting taxes.

After more than a month of discussion, Francis settled on one solution: Ask the faithful for more money.

On Feb. 11, he signed a chirografo, or papal directive, to boost donations. Three days later, he was hospitalized with double pneumonia. On April 21, he died, leaving his soon-to-be-chosen successor with a similar economic puzzle to the one Francis himself had inherited.

“Those of us who live and work here are obviously all too aware," said a cardinal who oversaw the Vatican’s humanitarian outreach under Francis, Michael Czerny. Cardinals gathering to elect a pope were given what he described as a “thorough report" on the Vatican’s finances: “I am concerned because of the effects on our mission, our staff, our programs."

Twelve years ago, the new Bishop of Rome was Francis, a pontiff elected with a mandate to fix the Vatican’s finances. But the first pope from the New World wasn’t prepared for the degree of resistance at the Curia, as the Vatican bureaucracy is known, his close advisers and allies said. 

He hired a professional auditor to modernize the finances—leading clergy to move Vatican funds to an account under a cardinal’s name and stockpile cash in a shopping bag. The auditor was mystified that nuns kept account ledgers in pencil and paper. At one point intruders broke into his office and tampered with his computer. Eventually the Gendarmerie Corps of Vatican City State—its police service—got involved.

Professional accountants, encouraged by Francis, ran training workshops for clergy who balked at the rules like obtaining multiple signoffs for expenses. Prelates tried to hide funds from scrutiny, citing national security concerns for the secret ledgers of funding missionaries in countries where proselytizing is a crime. Other departments shrugged off the modern-day challenge of balancing the budget of a papal state whose origins stretch back more than a millennium. The pope himself shifted focus to other topics.

Meanwhile, the pension fund kept falling farther behind. Scandals over a $400 million real-estate investment ended with a cardinal being convicted of embezzlement and fraud in 2023.

The problems will now fall to Francis’ successor, who will be elected by cardinals from 70 different countries and territories in the Sistine Chapel starting Wednesday. 

Cardinals from the U.S. and Germany—the countries with the biggest donor bases—have given lengthy presentations to their brethren on the fragile state of the Vatican’s finances and efforts to repair them. Others view the financial strains as earthly concerns that are secondary to the Church’s main mission of saving souls.

To understand the combination of deficit spending and mismanagement that is driving the Vatican into unsustainable debt, Wall Street Journal reporters met officials from the Vatican’s bank, pension fund and regulatory institutions and with cardinals attending this week’s conclave. Several met in secret, in locations arranged over Signal, citing an atmosphere of suspicion as the Vatican’s balance sheet deteriorates and blame circulates. One top Vatican finance official refused to speak in detail until he was assured that Journal reporters were not surreptitiously recording him—pointing to an incident in which a cardinal, facing trial for embezzlement, covertly recorded the pope himself.

The first concern, they said, was a culture of financial malpractice that Francis was unable to defeat before his death. Shortly before the pope died, one of the banks managing assets for the Institute for the Works of Religion, or IOR, as the Vatican Bank is also known, cut ties—a sign of dwindling confidence in the Curia’s anti-money-laundering practices.

The deeper concern is the unforgiving math of running a cash-strapped country of tremendous wealth. Vatican museum walls are lined with the masterpieces of Michelangelo, Caravaggio and Leonardo. More than 1 million old and rare books are stored under the vaulted, frescoed ceilings of the Vatican Library, including some of the earliest extant Greek-language manuscripts of the Old and New Testaments. 

But the Vatican has no intention of ever selling off its inheritance. It lists many priceless works of art, including the Sistine Chapel, on its books at a nominal value of one euro each, as a way of indicating it prizes their religious and artistic significance over their financial worth. And yet the upkeep and insurance are burdensome.

The result is a paradox. A tiny country of unfathomable riches has been unable to sustain the basic functions of a state without running a perilous deficit. The country, per capita, has one of the highest percentages of residents working in finance. Yet its budget is ultimately controlled by clergy more versed in the spiritual mission of the church than the nuts and bolts of running a government, bank or treasury department.

It boasts a workforce of unmarried clergy that most pension-fund managers would dream of servicing: no spouses or dependents to pay as beneficiaries. Nonetheless, its pension fund will be unable to meet its obligations “in the medium term," Francis warned in a letter last November.

“Five-alarm fire is what I tend to hear from people," said Ed Condon, editor of The Pillar, the Catholic news website, about the Church’s finances, particularly the pension fund. “Some very, very unpleasant decisions are going to have to be made."

A Vatican spokesman didn’t respond to a request for comment.

‘The root of all evil’

Paying the bills wasn’t always so difficult for the pope. The crusades, the Sistine Chapel and Saint Peter’s Basilica were all financed in part by the sale of indulgences—a sixth-century invention that allowed the faithful to buy forgiveness for their sins, although the practice was considered so corrupt it helped spark the Reformation.

Into the middle of the 19th century, the Papal States taxed the rich farmland of what is now central and northern Italy, providing a steady income stream. That ended in 1870, when armies of the newly united Italy wrested Rome from Pius IX. That left a 0.2-square-mile estate in the middle of the ancient capital for what would become Vatican City.

With a population made up primarily of priests, nuns and church workers, it didn’t have much of a tax base. But the Vatican eventually realized it could leverage its tax-exempt status to become a financial hub, and its newly created bank over time took sizable shares in Italian and European companies.

The Vatican developed a reputation for murky financial practices, and the Vatican Bank was plagued by scandals, including allegations of money smuggling and laundering, for decades. The bank in the early 1980s became embroiled in the collapse of Italian lender Banco Ambrosiano, whose chairman, Roberto Calvi, was found dead with bricks in his pockets, hanging under London’s Blackfriars Bridge. The Vatican Bank agreed to pay almost $250 million to settle claims by the Italian bank’s creditors. But the question of how to finance a tax-free theocratic city-state lingered.

When Pope Benedict XVI was elected in 2005, the rolling scandals were evolving into a financial crisis. One of the Vatican’s most lucrative income sources by then was a two-pump gasoline station located about 50 yards south of St. Peter’s, serving cars lined up to fill their tanks with gas that cost up to 30% less than in Italy. The German pontiff established a unit to combat money laundering and asked Moneyval, the European Union’s financial crimes watchdog, to look into accounts. For the first time, the Vatican Bank started releasing annual reports.

But by July 2012, Moneyval said the Vatican was still failing in almost half of its 16 key areas of financial standards and called on the Vatican to strengthen measures to prevent money laundering and terrorist financing.

In January 2013, Italy’s central bank lost patience and blocked all electronic payments to Vatican City, leaving tourists unable to take money from ATMs or to use their bank cards. Priests had problems executing payments. Within a month, Benedict announced he would resign, the first Pope to do so since Gregory XII in 1415.

One step forward

Francis was elected in 2013 with a mandate to tackle the financial rot, and within weeks he had summoned a panel of cardinals from around the world to advise him. Moneyval warned that the Vatican Bank would be blacklisted if it didn’t tighten money-laundering rules. An internal report signaled to the new pope that the pension fund was in trouble. About a third of it was unwisely tied up in real estate, employees needed to contribute more to their own retirement, and the entire fund was facing up to 1.5 billion euros of liabilities it wouldn’t be able to honor—a number set to keep rising without significant reform.

Francis, who had witnessed the cost of financial mismanagement in his homeland of Argentina, established a new secretariat for the economy to run the Vatican’s finances. The group, made up of prelates and external financial experts, was led by Australian Cardinal George Pell. Jean-Baptiste de Franssu, a former chief executive of Invesco Europe, was tapped to run the Vatican Bank, which closed thousands of accounts, purging clients suspected of using the Vatican to evade taxes.

When Pell’s department began tracking budgets across the Curia, it riled the Congregation for the Doctrine of the Faith, the Vatican office that enforces church teaching and is historically known as The Inquisition. Those officials worried that Pell’s new department would seize control of funds they used for discretionary spending.

Cardinal Gerhard Ludwig Muller, who then led the doctrinal office, said the department’s treasurer returned from a briefing with Pell’s team one day in a state of alarm and advised that the congregation “save our money" by withdrawing funds from one of the congregation’s Vatican Bank accounts and storing the cash in a bag. The treasurer also transferred funds to a different bank account under Muller’s name—another attempt to conceal funding from Pell, Muller said.

The treasurer, Muller said, was an Italian prelate who struggled to communicate in English with Pell’s team and was “absolutely confused."

Shortly after, in spring 2015, the Vatican hired Libero Milone, a former Deloitte executive who had worked at the accounting firm for more than 30 years, to become the Vatican’s in-house auditor. Pell asked him to look into the accounts of the doctrinal office, which was late in delivering its budget.

Milone questioned the doctrinal office’s treasurer. He eventually discovered that more than $500,000 was missing from the doctrinal office’s Vatican Bank account—later found in a shopping bag and in the account under Muller’s name.

“We were trying to get a hand on how things happen in the Vatican," Milone said.

Milone reported his findings to the Vatican’s financial watchdog as well as the prosecutors’ office. But neither took action, he said. In early October 2015, Milone took the matter to Pope Francis himself. Instead of taking legal action, Francis wanted the auditor to simply fix the problem.

“He has to give the money back," Francis told the auditor.

“Well, that’s not my responsibility," Milone replied.

Francis insisted that Milone report his findings to Cardinal Muller, adding: “I’m sure he will give the money back."

Milone said he met with Muller and the money was returned to the congregation’s account. Muller said that the handling of the funds was “a little bit strange or not modern" but that keeping access to the funds was vital for maintaining the congregation’s operations, whether it was hosting an international commission of theologians or buying office supplies. Getting funds from the Vatican’s treasury—known as the Administration of the Patrimony of the Apostolic See, or APSA—could take a year, he said.

Soon, Milone himself was in a power struggle with APSA, which functions as the Vatican’s Central Bank and clears Vatican transactions. After the auditor questioned APSA’s accounting practices, APSA began scrutinizing Milone’s own expense reports, asking why he and his team purchased items as minor as coffee outside the Vatican City borders. Milone pleaded with APSA that the coffee in Rome was cheaper and tastier than what was available in the Vatican. As that fight broiled on, efforts to reform the pension plan stalled.

Break-in

In September 2015, Milone discovered his office had been broken into. He arrived on a Monday to find the bottom of his computer was unscrewed, with a spring missing, he said. Francis, instead of pressing for an investigation, proposed installing security cameras outside the office.

“Do you still feel independent?" Francis asked Milone.

In March 2016, Milone began to press Archbishop Giovanni Angelo Becciu and other officials in the Vatican’s powerful Secretariat of State for documentation on the department’s 750 million euros in investments, half of which was in real estate, the auditor said. Becciu’s department declined to provide the documentation, Milone said.

In June 2017, Becciu summoned Milone to his office to deliver a message.

“The pope no longer has faith in you," Becciu said, according to Milone.

Milone asked to see the pope, but the archbishop refused. Instead, Becciu phoned the Vatican gendarmes who detained Milone for 12 hours on suspicion he had hired private investigators to spy on Vatican employees. Milone denied the accusation, saying he had hired external consultants to investigate the tampering of his computer and to sweep for bugs in his office, which was outside Vatican walls. After the interrogation, Milone phoned his secretary to dictate his letter of resignation, he said, only to learn that the gendarmes already had a draft of one on file.

Lawyers for Becciu said the cardinal “didn’t block in any way the activities of the auditor," adding that he was following orders. In meeting Milone, Becciu was “communicating a decision from the Holy Father," the lawyers said, adding that the involvement of the gendarmes wasn’t Becciu’s call.

The next year, Francis raised Becciu to the rank of cardinal and made him head of the Vatican office that oversees the canonization of saints. The Italian cardinal was a rising star, even mentioned as a potential future pope.

Two years later, he emerged from a 20-minute meeting with the pope with a very different status—that of an accused criminal. Vatican magistrates alleged Becciu had embezzled more than $100,000 through a nonprofit group run by his brother. The magistrates also alleged Becciu was negligent in overseeing what became a $400 million investment into a building in London’s elite Chelsea neighborhood. Becciu denied the charges; Francis told him to resign his Vatican post.

Becciu and nine others faced charges that also concerned the alleged misuse of money intended to free a kidnapped nun. Days before the trial began, in 2021, Becciu called Francis, put the pope on speaker phone, and secretly recorded him as he asked the pontiff to confirm authorizing a complex financial arrangement in which the nun’s ransom was paid through a self-described security consultant. The consultant was later convicted of embezzlement after the court ruled she had spent Becciu’s payments on luxury holidays and designer goods.

The Vatican sold the London building for about $225 million in 2022, a steep loss. Becciu was found guilty of fraud and embezzlement in 2023, a conviction he is appealing.

The struggle between Francis and the Curia over finances escalated. The Pope slashed the salaries for the Church’s 250-odd cardinals three times. In early 2023, Pope Francis said he would stop providing discounted Vatican housing to senior officials. Those moves expressed Francis’ vision for the clergy: to live modestly, with humility.

The deficit continued rising. Last September, Francis issued a letter demanding the Vatican set a rigorous timeline for achieving a “zero deficit" regime. A few weeks later, he signed another letter, warning the current pension system suffered “a serious prospective imbalance," and predicted the Vatican would have to make “difficult decisions." He died before any substantial decisions could be taken.

As cardinals gathered in Rome, Becciu demanded admission to the conclave, arguing the pope had never stripped him of his title as cardinal. He relented after Cardinal Pietro Parolin, Becciu’s former superior and a front-runner to replace Francis, disclosed the existence of two letters that he said were written by the late pontiff, barring Becciu from the sacred vote.

Some cardinals this week have been critical of the emphasis some have placed on the Vatican’s financial struggles.

“Jesus sent the Apostles and later the bishops into the world to preach the Gospel of salvation, redemption, hope to everybody. This remains the main issue for the Church," Muller said. “The other questions—the financial state of the Vatican—it’s not so important for the essence."

Write to Drew Hinshaw at drew.hinshaw@wsj.com, Joe Parkinson at joe.parkinson@wsj.com and Stacy Meichtry at Stacy.Meichtry@wsj.com