The Turmoil In The Papal Foundation

For a good part of my working career, I had to deal with internal and external auditors. I figured out pretty quickly that it's always best to tell these guys what they want to know, and if you develop a good relationship, they can be useful friends. Or not. But never, ever get them mad at you. I worked at a couple of companies that ran into disagreements with their outside auditors or the audit committees of their boards, and the result was never good -- the Securities and Exchange Commission or the Internal Revenue Service was usually at the door soon afterward.

So in going over the recent news about the Papal Foundation, the biggest red flag I saw was this:

Late last year and in early January, the Papal Foundation approved initial assistance packages of $8 million and $5 million for the Istituto Dermopatico dell’Immacolata, a Rome-based outfit wrapped up in scandals involving alleged money laundering and reeling from a roughly $1 billion siphoning scheme. (A four-year investigation led to 24 separate indictments last year.) The Vatican named new hospital leadership in 2017.

An unofficial summary prepared by James Longon, the chairman of the Papal Foundation’s audit committee, declares: “. . . In many respects, the decision to grant $25 million to a dermatology hospital in Rome without proper due diligence is a disaster for the Papal Foundation.”

The board maintains that due diligence was conducted, but Longon resigned from the committee and as a trustee.

When the chairman of a board's audit committee resigns in protest, this isn't just because the CEO forgot his daughter's name or something, count on it.

Interestingly, the most perceptive reporting on this issue in the US (the article cited above is from the UK Catholic Herald) has been in Nonprofit Quarterly, not in the Catholic press or blogosphere. In one article last March, it wrote:

The 85 individuals and couples listed as stewards each pledge a gift of at least $1 million, payable over a ten-year period. In reaction to the concerns expressed by the stewards who provide much of the foundation’s financial support, the cardinals have “walked back their promise of assistance” to the hospital and Cardinal Wuerl has requested that the Vatican not accept $12 million in funds previously approved by the foundation for the hospital’s support. The cardinals have also proposed giving lay members of the foundation more of a voice in how grants of $1 million or more are awarded.

The Wall Street Journal quotes one anonymous donor who has suspended his annual contribution: “I would feel a lot more confident with my money there, and recommending to other people to be stewards, if I knew it was being managed by business people and not theologians and priests. There’s a risk of killing the goose that laid the golden egg.”

Despite a specific mission to support the pope and the Catholic church, and despite by-laws that explicitly place ultimate decision-making authority in the hands of the American cardinals who constitute a minority of its board, the Papal Foundation is finding there are other constituencies that must be satisfied in order for the nonprofit’s mission to be pursued sustainably and successfully.

Longon was replaced on the audit committee by Timothy Busch, a wealthy Californian who founded the Napa Institute, was the force behind the Diocese of Orange acquiring the Crystal Cathedral, and is, according to this piece, closely allied with Archbishop Carlo Maria Viganò.

The visitor who sent me the Italian links in yesterday's post suggests that ultimately, the Vatican financial scandals could affect its diplomatic status as a state. According to a recent law review article,

Statehood brings with it obligations to accept responsibility for internationally wrongful acts that were committed by, or can be attributed to, the state. The Vatican has been allowed, in effect, to select attributes of statehood that it wishes to enjoy (such as those conferring powers, influence and immunities) without accompanying those privileges with an acknowledgement of the obligations that normally attend statehood.

Note that very recently, the Vatican cited sovereign immunity in refusing to allow Cardinal Ladaria to appear before a French court. The law review article predates this, but it's clearly the sort of case it anticipates. As the opportunity arises, I'll discuss this in more detail. But I think, again, that the head of a board's audit committee doesn't resign in pique just because the CEO forgot his daughter's name.