The head of the Vatican's central bank appeared to admit this week to a transaction that could be a violation of European regulatory commitments, namely a loan of 50 million euros to finance the purchase of a struggling Italian hospital.

Sources say a controversial grant from the U.S.-based Papal Foundation was requested in order to balance the central bank's books after the hospital was unable to repay the money.

In a statement Tuesday, Bishop Nunzio Galantino, head of the Administration of the Patrimony of the Apostolic See (APSA), acknowledged that the Vatican’s central bank loaned 50 million euros to finance the purchase of the Italian hospital, the Istituto Dermopatico dell’Immacolata (IDI), even though APSA is prohibited from making loans that finance commercial transactions, by policies put in place to exempt it from external oversight.

The loan was made in 2015 to the non-profit Fondazione Luigi Maria Monti, a partnership between the Vatican Secretariat of State and the Congregation of the Sons of the Immaculate Conception, the hospital’s previous owners, under whose management the hospital was driven to bankruptcy following a series of embezzlement scandals that led to multiple prosecutions and debts of more than 800 million euros.

The hospital was purchased by the foundation while it was in state-administered insolvency. When it became clear that the APSA loan could not be repaid by hospital income, Vatican efforts were made to secure a $25 million grant from the U.S.-based Papal Foundation to the IDI, which would be used to cover the hospital's debt to APSA.

Although the grant was requested to ease a short-term cash shortage at the hospital, multiple sources in Rome and the United States told CNA that the money was actually intended to help replace the funds loaned to finance the acquisition, removing the loan from the APSA balance sheet and avoiding more attention on the deal.

Lay members of the Papal Foundation had reportedly raised issues with the conferral of the grant, largely because details about the use and final destination of the funds were scant. Approval of the grant was ultimately pushed through the foundation’s board, over the objections of lay members, but dispersal of the funds was slowgoing as conflict enveloped the foundation’s board.

In April, a spokesman for the Papal Foundation told First Things magazine that “As The Papal Foundation Board responded to the grant request, a variety of interpretations of the true financial condition of the IDI and its sponsoring entities were presented.”

“Among the elements of the discussion was the still unclear relationship of the religious congregation that originally sponsored IDI, the recently formed Fondazione Luigi Maria Monti, that was now considered responsible for what have been the properties of the religious congregation, and the IDI itself. Sorting out who was responsible for what part if any of the bankruptcy assessment was also a part of the Papal Foundation’s discussion. All of this discussion was made more difficult by conflicting interpretations.”

“At the December 2017 Board meeting, Cardinal [Donald] Wuerl presented the information made available to the public and that provided by the Holy See. Other interpretations were also offered. The Board voted to make the requested grant,” the spokesman said.

When the grant money stalled, APSA was forced to write off 30 million of the 50 million euro loan, wiping out APSA’s profits for the 2018 financial year.

Galantino was compelled to acknowledge the loan and the write-off following the Oct. 21 publication of a book that alleged that the Vatican was nearly insolvent.

The book, “Universal Judgment,” published by Italian journalist Gianluigi Nuzzi, claims to be based on more than 3,000 pages of leaked Vatican documents. It alleged that in 2018 APSA had failed to make a profit from the Holy See’s property and investment portfolio for the first time in its history.

Galantino, who has been president of APSA since June 2018, said the book did not reflect the real situation.

“In fact,” he said, “the ordinary management of the APSA in 2018 closed with a profit of over 22 million euros.”

He attributed reported losses on “an extraordinary intervention aimed at saving the operation of a Catholic hospital and the jobs of its employees,” in an apparent reference to the IDI loan and purchase.

While Galantino defended the project as an effort to preserve the hospital and save jobs, APSA’s involvement to underwrite a commercial acquisition appears to violate a 2012 commitment to stop acting as a private or commercial financial institution.

That commitment was the result of an on-site inspection by Moneyval, the Council of Europe’s Committee for combating money laundering and terrorist financing.

After the inspection, APSA agreed to stop providing services to individuals or taking part in commercial transactions, with these functions being transferred to the Institute for Religious Works (IOR), often referred to as the Vatican Bank, which maintains accounts for Vatican employees, individuals and religious groups. APSA was to be limited to administering the sovereign assets of the Holy See, meeting payroll and operational costs, and functioning as the national reserve bank of the Vatican.

In exchange for agreeing to step back from commercial activity, APSA was exempted from annual inspections by the Vatican’s Financial Intelligence Authority (AIF), whose efforts are assessed by Moneyval.

Following the changes to APSA’s remit, only the IOR, and not APSA, has been listed as a financial institution under the oversight of the Vatican’s Financial Intelligence Authority (AIF), whose efforts are assessed by Moneyval.

In 2014, Pope Francis issued new norms, transferring oversight and control of APSA’s remaining investment functions to the Prefecture for the Economy, then headed by Cardinal George Pell.

The AIF’s 2015 annual report concluded that since it is no longer an “entity that carries out financial activities on a professional basis,” “APSA stopped being a part of AIF’s jurisdiction at the end of 2015” - but in the same year APSA made the loan to purchase the IDI out of insolvency.

The 2015 AIF report which exempted APSA from further scrutiny said that “If APSA were to carry out financial activities on a professional basis, it would fall again under the jurisdiction of AIF which… must publish and update the list of subjects who must comply with the requirements set forth in [relevant law].”

The acknowledgement by Galantino that APSA was in 2015 engaged in prohibited lending activity casts doubt over reported progress in combating financial corruption in the Vatican, and suggests that it has been operating out of sight of Vatican and European financial watchdogs.

In 2016, Pope Francis partially reversed some of the 2014 reforms, returning control of its investment activity to APSA from the Prefecture for the Economy.

In his book released Monday, Nuzzi also claimed that, despite the 2012 commitment to Moneyval, APSA still has private numbered accounts for individuals on deposit. Such accounts at APSA have been linked to previous money laundering accusations and scandals in the Vatican, and their elimination was crucial to its exemption from AIF oversight.

Galantino denied these claims, saying that no funds were held, managed or invested for anyone or any body except Vatican departments and the Vatican City State.

“APSA has no secret or encrypted accounts” Galantino insisted on Tuesday, “anyone is welcome to prove the contrary.”

Definitive proof is unlikely to emerge, barring a decision by the AIF to reapply Moneyval’s anti-money laundering regulations and inspections to APSA - something which is itself highly unlikely in the current climate.

Three weeks ago, Tomasso Di Ruzza, head of the AIF, was himself suspended following raids carried out by Vatican police. On Oct. 23, the AIF issued a statement announcing his return to duty and insisting that an internal investigation had been conducted following the raid and that no wrongdoing had been discovered.

“Neither the Director nor any other employee of AIF improperly exercised his authority or engaged in any other wrongdoing,” the statement said.

“Accordingly, the Board of Directors reaffirms its full faith and trust in the professional competence and honorability of its Director and, moreover, commends him for the institutional work carried out in the handling of this particular case.”

The statement concluded by saying the AIF hoped any “potential misapprehensions” to the contrary would “soon be clarified.”