* Bank president leaves after no-confidence vote
* Gotti Tedeschi's house searched for documents in separate case
* Vatican committed to making so-called "white list"
* Bank wants to put past image problems behind it
VATICAN CITY, June 8 (Reuters) - For a financial institution whose ATMs offer Latin as a language option, whose offices are below the pope's windows and where tellers work under the gaze of crucifixes, one might assume the Vatican bank would have a dispensation from earthly travails.
But new judicial woes and internal upheavals at the bank, officially known as the Institute for Works of Religion (IOR), have raised new hurdles for the Vatican, just as it entered the final stretch of years of efforts to join the international club of financial righteousness.
On May 24, in the type of corporate drama rarely seen in the Vatican, Ettore Gotti Tedeschi, 67, the Italian president of the IOR, stormed out of the bank's executive offices.
He had spoken for 70 minutes non-stop in the boardroom to defend his management but left in a huff when it became clear that the other four board members were intent on approving a no-confidence motion against him.
Gotti Tedeschi, a conservative Catholic who heads the Italian retail unit of Spain's Banco Santander (SAN.MC), went to his car in the Sixtus V Courtyard and left the Vatican via the nearby Saint Ann's Gate, receiving a customary crisp salute by a Swiss Guard oblivious to the drama that had just unfolded.
"During the deliberations, at 4:00 p.m., you abandoned the premises of the Institute without notice and without waiting to receive notice as to the results of the no-confidence vote," says a memorandum of the meeting seen by Reuters.
A day after the astonishing arrest of the pope's butler in an affair of purloined documents, and 30 years after a Vatican-linked financier known as "God's Banker" was found hanged from a bridge in London, the last thing the Holy See needed was more headlines about its bank, housed in the 15th-century Tower of Nicholas V, which Pope Benedict can see from his bedroom window.
For the past two years the Vatican, a 108-acre sovereign city-state surrounded by Rome, has been pulling out all the stops to make the "white list" of states that comply with international standards against tax fraud and money laundering.
Recently, the T-word - transparency - had become a mantra in the Vatican, which hoped a decision by European financial institutions would soon allow it to put its bank's often murky past behind it for good.
But since May 24, the T-word has been wielded as a weapon by both Gotti Tedeschi and those who showed him the door.
"I have paid the price for transparency," Gotti Tedeschi told Reuters just a few minutes after the no-confidence vote.
Board members who voted him out said the opposite was true.
"Categorically, this action by the board had nothing to do with his promotion of transparency," said Carl Anderson, one of the five external financial experts who make up the board.
"In fact, he was becoming an obstacle to greater transparency by his inability to work with senior management," Anderson, the American head of the worldwide Catholic charity group, Knights of Columbus, told Reuters.
Another person familiar with the matter said: "It was not a question of 'let's plot the demise of this man', as Italian newspapers might lead one to believe. There were many pleas from many people saying, 'Come on, you have to start acting like a president'."
The confidential memorandum listed nine reasons for the move against Gotti Tedeschi. It accused him of failure to carry out basic duties, failing to attend board meetings, "progressively erratic personal behaviour" and "exhibiting lack of prudence and accuracy in comments regarding the institute".
But the memo gave a clue to something perhaps more worrying: "Failure to provide any formal explanation for the dissemination of documents last known to be in the president's possession."
The careful wording appeared to be used so as not to accuse Gotti Tedeschi of personally leaking documents but suggesting they may have reached the media through an intermediary.
THE BUTLER AND THE BANKER
Gotti Tedeschi's abrupt departure came one day after Pope Benedict's butler, Paolo Gabriele, was arrested in the most clamorous chapter so far of the so-called "Vatileaks" scandal, in which sensitive documents have appeared in the media since January, including some related to the IOR's transparency bid.
That bid began late in 2010, when the Vatican, the world's smallest state, with around 500 residents, drafted new financial transparency laws and set up internal regulations to make sure its bank and all other departments adhered to international standards on money laundering and terrorism financing.
The move was an attempt to make the "white list" of the Paris-based Financial Action Task Force (FATF), a body that lists states according to their compliance with those standards.
The Vatican established an internal Financial Information Authority (FIA) along the lines of other countries and promised to liaise with the FATF and law enforcement agencies.
But leaked documents appeared to show a conflict among top Vatican officials over just how transparent the bank should be about its dealings before the new laws came into force in 2011.
In one letter, Cardinal Attilio Nicora, head of the new FIA, complained to Secretary of State Cardinal Tarcisio Bertone that a change in the FIA's charter had weakened its oversight powers and could be seen as a step backwards by European authorities.
Both are members of the commission of five cardinals that oversee the bank and its board.
In another setback for the bank, JP Morgan closed the IOR's account in Milan in March this year because it felt the bank had failed to provide sufficient information on money transfers.
A person in the Vatican close to the situation called JP Morgan's action "unjustified and taken after pressure from Italian regulators".
In the two weeks after Gotti Tedeschi left, the bank saga, combined with the arrest of the pope's butler, had already taken on the contours of a suspense-filled Machiavellian intrigue inside mediaeval walls. But more surprises were to come.
Gotti Tedeschi, said by his friends to be nervous and shaken, had left Rome to seek solace in his home in the centre of the tranquil city of Piacenza in the northern Italian plains.
At 5:30 a.m. on Tuesday, June 5, he was leaving his apartment in a centuries-old building with an internal cloister to drive to his office in Milan.
Four members of Italy's financial police stopped him with a search warrant signed by Naples magistrates investigating a kickback scandal involving defence technology group Finmeccanica (SIFI.MI).
Gotti Tedeschi is a close friend of Finmeccanica CEO and Chairman Giuseppe Orsi, who is under investigation in the probe, and magistrates believed the former Vatican banker may have held documents relevant to the Finmeccanica probe.
While looking for evidence in that case, police found a dossier compiled by Gotti Tedeschi concerning his nearly three years at the helm of the Vatican bank, according to judicial sources.
His lawyer, Fabio Palazzo, said police had confiscated notes that his client believed would be useful to counter the accusations made by the board of the Vatican bank when it voted its no-confidence motion.
Rome magistrates flew up to Milan to question him about a separate money-laundering investigation that began in 2010 when they froze 23 million euros ($33 million) the IOR held in an Italian bank.
The Vatican said at the time that its bank did nothing wrong and was merely transferring its own funds between its own accounts in Italy and Germany. The money was released in June 2011, but the investigation is continuing.
No one doubts that since its founding on Feb. 11, 1887, by Pope Leo XIII and its restructuring by Pope Pius XII in 1942, the bank has sometimes strayed from the narrow, virtuous path of ethical banking.
"The IOR has been accused of everything from helping rich Italians avoid taxes to laundering money for the Mafia and for people who wanted to pay bribes to Italian politicians," Father Tom Reese wrote in his landmark 1996 book "Inside the Vatican".
The IOR's most infamous entanglement with scandal involved the collapse 30 years ago of the Banco Ambrosiano, with its lurid allegations about money-laundering, freemasons, mafiosi and the mysterious death of Ambrosiano chairman Roberto Calvi.
The IOR held a small stake in the Ambrosiano, then Italy's largest private bank, and investigators alleged that it was partly responsible for the Ambrosiano's fraudulent bankruptcy.
The IOR denied any role in the collapse but paid $250 million to creditors in what it called a "goodwill gesture".
Several investigations have failed to determine whether Calvi, who was found hanging under Blackfriars Bridge near London's financial district, killed himself or was murdered.
The events earned Calvi the epithet "God's Banker" and despite the passing of three decades, the long shadow of the affair still hangs like an albatross around the bank's neck.
Some ask why the Vatican needs a bank at all. For money, under an agreement with the European Union, it simply uses the euro used in Italy.
The bank's official purpose, according to the Vatican yearbook, is to "safeguard and administer" money and real estate entrusted to it by "persons or organisations whose purpose is works of religion or charity".
Religious orders of priests and nuns, dioceses around the world, Catholic charity groups and Vatican employees can have accounts there.
Supporters of the Vatican bank say the pope needs an independent financial institution to run the 1.2 billion member Church and keep it free from politically motivated attempts to curtail its work by controlling its money flow.
The bank's independence was fundamental, for example, in the movement of funds to keep churches in the Soviet bloc alive during the Cold War.
Not a few people in the Vatican believe IOR is a target of politically or financially motivated attacks by special interests who would have a lot to gain, financially or ideologically, if the IOR ceased to exist.
"I can think of a number of Italian banks who would love to manage the Vatican bank's billions of dollars in assets," said one person familiar with the situation.
Those people also see what they call "disproportionate scrutiny" on the part of the Bank of Italy, Italy's central bank, which requires Italian commercial banks to show what is known as "enhanced due diligence" in their dealings with IOR.
WAITING FOR MONEYVAL
Retail clients - be they Vatican cardinals or cleaners, priests or postal workers - enter the bank through the base of the Tower of Nicholas V. Glass enclosed metal detectors give way to a few steps leading up to the main banking hall, whose teller slots are arranged in a semicircle.
But the serious business is done in the "back" offices on the tower's upper floors, where managers sit in modern offices. That is where board members, cardinals and lawyers are working to put the bank's image problems behind it.
The next hurdle the bank faces is that of MONEYVAL, short for the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism.
MONEYVAL, which was established by the Council of Europe in 1997, is a monitoring mechanism that aims to ensure that its 47 member states across the continent have in place effective systems to fight money laundering and terrorism financing and comply with international standards.
Following a Vatican request, a MONEYVAL team visited last November and again in March and is now drafting a report which is due to go before the MONEYVAL plenary in July.
The report will rate the Vatican's compliance with international standards according to four levels - compliant, largely compliant, partly compliant and non compliant - and will include an action plan with recommendations.
Other organisations, such as the FATF, use the MONEYVAL assessment to place states on black, grey or white lists.
"There is a commitment that we are going to be on the white list," said Anderson, the board member who signed the board's no-confidence memorandum against Gotti Tedeschi.
"We are going to continue doing everything necessary to reach that standard. There is no question the board and management are fully committed to that," he told Reuters.
As the pope looks down from his apartment in the Apostolic Palace onto the IOR offices in the Tower of Nicholas V below, he can only give such a commitment his blessing.
(Additional reporting by Paolo Biondi, Laura Viggiano and Giselda Vagnoni; Writing by Philip Pullella; Editing by Alastair Macdonald)
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