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VATICAN CITY, Aug 4 (Reuters) - Two years ago, the Vatican bank invested 15 million euros in an Italian television company that makes family movies, including films about popes and a series about a bike-riding country priest who helps police solve crimes.
The Vatican's then Secretary of State Tarcisio Bertone ordered the investment in Lux Vide SpA, which he said shares the Holy See's "lofty goal of evangelisation".
Bertone, who was the second-in-command to former Pope Benedict, pushed the deal through despite objections from the bank's director and board members, who thought the expense was too big and not justified for the bank, according to current and former bank executives.
Last month, the Vatican booked a loss for the entire amount spent, as part of a wider review of Vatican finances that has also led to the closure of hundreds of accounts at the Institute for Religious Works, or IOR by its Italian acronym, as the bank is called.
Bertone, who still stands by the decision to invest in the television company, said that when the bank approved the deal it did so with the board's unanimous consent.
The zeroing of the Lux Vide investment is emblematic of Pope Francis's effort to loosen ties between the Holy See and Italy's business and political world, a longstanding network of relations the Argentine pontiff considers improper to the Church's religious mission.
In his first 16 months in office, Pope Francis has been trying to reform the Curia, as the Vatican's central administration is called. He has hired international consulting firms to improve financial accounting procedures. He has given broad economic powers to an Australian cardinal seen as distant from the centres of power in Italy.
In the process, one of the biggest changes has been to curtail the powers of the Vatican Secretary of State, in particular over the Holy See's financial affairs.
The Secretary of State has always held an important role, serving effectively as deputy pope. But Bertone had amassed an unusually overarching power over Vatican administration and finances when he held the role between 2006 and 2013.
Former Pope Benedict, a theologian who continued writing professorial books after his election, had little interest in administrative affairs and gave Bertone free rein in running the Vatican administration.
Much of Bertone's power, which sowed such conflict within the Vatican over the years as to accelerate Pope Benedict's decision to retire in February 2013, was wielded through the IOR. Bertone presided over a committee of cardinals that oversaw the bank's board and directors.
According to former bank executives, Bertone backed a proposal for the IOR to buy up to 25 percent of Lux Vide in 2010 and, again in 2012. Both times, the bank's directors tried to reject the deal, saying it was not in the IOR's interest to invest in television companies and that the price was high, said the executives who asked not to be identified because they are not allowed to speak about bank business.
But the deal was eventually approved. "The board said 'this is not a good idea' but could not block the deal," said a current bank official. "The message was: the boss (Bertone) wants this."
Under the new structure created by Pope Francis, Bertone's successor as Vatican secretary of state, Cardinal Pietro Parolin, has no direct power over any of the financial affairs of the Holy See, including the IOR and APSA, the Vatican's asset management and investment arm. Pope Francis appointed an independent team of experts to oversee APSA, a sprawling entity that controls the Vatican's real estate holdings and acts as a central purchasing and human resources department, to see whether its deals are central to the mission of the Church.
For decades the Vatican had intricate relations with Italian politics and business. A notable example was the IOR's entanglement in the fraudulent bankruptcy in 1982 of the Banco Ambrosiano, whose president Roberto Calvi was found hanged under London's Blackfriars Bridge that year. The IOR, which said it was hoodwinked into backing the Italian bank, paid creditors a $250 million settlement.
But Pope Francis has made it clear that he wants a clean distinction between the role of the Church and politics and business.
"Politics is noble, it is one of the highest forms of charity ...," he told an interviewer last year. "We dirty it when we use it for business. Even the relationship between the church and political power can be corrupt if it does not converge for the common good."
Lux Vide SpA produces television programs and movies for RAI state broadcaster and other European channels. Its 2008 mini series about Coco Chanel was nominated for an Emmy.
It has also produced mini-series on the Bible and on the lives of a number of popes. Its productions, including "Convent Mysteries," about a young nun with a turbulent past who has found a vocation mixing sleuthing and religion - draw high audience shares in Italy.
The family company, now run by three children of founder Ettore Bernabe, first went to Bertone at the end of 2010, proposing that the Vatican invest some 20 million euros in a 25 percent stake in the company.
Bertone, who was then president of the committee of cardinals that oversaw the bank, liked the idea of helping a company whose television films gave the Church a good image.
"The IOR is called the Institute for Works of Religion. Obviously, Bertone thought this [Lux Vide's television productions] was a work of religion," Luca Bernabe, Lux Vide's chief executive officer, said in an interview.
Bertone took the proposal to then bank chairman Ettore Gotti Tedeschi, who rejected the idea. Gotti Tedeschi told Bertone that he "refused to do this with the pope's money," according to a former bank official with direct knowledge of events.
Bertone and Gotti Tedeschi had clashed before, including over other investments that Bertone wanted to make in an Italian bank and a hospital, according to current and former executives. The Lux Vide investment was at first put on ice. But Bertone and Gotti Tedeschi would clash over other issues, including efforts by the bank to comply with international rules against money laundering. In May, 2012, Gotti Tedeschi was fired.
Barely a month after Gotti Tedeschi's departure, Lux Vide made a new proposal to the IOR. Current and former bank officials say the board, now without a chairman, initially rejected the new offer as well, but finally approved it after a strong push by Bertone.
The bank bought a 15 million euro convertible bond which would give it a 17 percent stake in Lux Vide in a deal finalised in December, 2012.
"You get a recommendation. 'Please consider this'. OK, we considered it and we don't think it's a good idea. 'OK take a look at it again.' OK, now we've looked at again, we really don't think it's the best investment. 'Thank you very much, now I want you to do it anyway,'" said a former bank official with direct knowledge of events, characterising Bertone's role in pushing the board to approve the deal.
In an email to Reuters, Bertone said the Lux Vide deal had been unanimously approved by the board. He said the company's "television series and films of Biblical and Christian inspiration and educational nature adhere to church projects on evangelisation".
Three months after the deal, on Feb 11, 2013, Pope Benedict announced that he would abdicate at the end of that month. On Feb. 15, in one of his last appointments, Benedict named a fellow German, Ernst Von Freyberg, to succeed Gotti Tedeschi as IOR chairman.
A cascade of changes took place at the bank, including the resignation of two top directors and the arrest of a Vatican accountant who is standing trial on charges of using the IOR to help his rich friends launder money. The two directors are also due to stand trial on charges of violating Italy's anti-money laundering norms. They all deny wrongdoing.
In October of last year, Bertone was replaced as secretary of state. Months later, as part of Pope Francis's wider review of the bank, Bertone and the three other cardinals of the IOR's oversight committee were removed from their posts. The pontiff also instituted a new department, the Secretariat for the Economy, to oversee Vatican finances, putting it in the hands of Australian Cardinal George Pell.
Freyberg stepped down from the chairmanship of the bank last month. One of his last moves was signing off on the bank's 2013 financial figures which included the write off of the entire value of the Lux Vide investment.
The decision to write it off was taken because Freyberg believed the bond had been purchased without any guarantees on the performance of Lux Vide, a bank official said.
Bernabe, the Lux Vide chief, said he believes the bond is still worth roughly what the IOR paid for it - about 15 million euros. He added that the family business had 600,000 euros in net profits in 2013.
But rather than try to put a value on the bond, the IOR under Freyberg took a 15 million euro charge for its full cost and donated the bond to the Science and Faith Foundation, a Vatican-run think tank, clearing it off the bank's books. Monsignor Tomasz Trafny, an official at the Science and Faith Foundation, said he did not know what the bond could be worth.
The charge to unwind the Lux Vide deal, combined with other extraordinary costs related to the bank's clean up operations, nearly wiped out its profit for last year, according to the accounts signed off by Freyberg and released last month. Profit fell to 2.9 million euros from 86.6 million euros in 2012.
A spokesman for the bank said there would be no comment on the Lux Vide deal beyond what was published in the 2013 financial figures. (Editing By Alessandra Galloni and Peter Graff)