August 11, 2002

VATICAN BANK IS SUED IN US OVER CHARITY SCANDAL

SIMON FLUENDY AND GRAEME BEATON

Pope John Paul II can rest easy: as a head of state, he will escape court.

But a legal action in the US has dragged figures near the pinnacle of the Vatican, including two cardinals, into the seedy tale of the insurance fraud that reaped Marty Frankel hundreds of millions of dollars as he fed his appetite for diamonds, high-class hookers and pornography.

The Frankel case came to light in 1999 when firefighters were called to his GBP 2 million mansion in a smart Connecticut neighbourhood.

Inside, they found pornography, a ouija board and a 'to do' list that included a reminder to shred documents and find out which countries did not have extradition treaties with the US.

After a five-month chase, Frankel was cornered in a German hotel. In May, he pleaded guilty to 23 counts of racketeering and fraud at Mississippi Federal Court. A week ago, he admitted a further five fraud charges in Tennessee.

Facing prison sentences of up to 150 years, his guilty plea and a promise to help track down the loot he stole should secure him a lower term. But now, it is being alleged that Frankel's fraud was known to those near the top of the Vatican.

Mississippi has filed a lawsuit against a monsignor at the Vatican, alleging he was in on the scam, which used Catholic charities as fronts for tricking investors.

Insurance commissioners of five US states are seeking $ 600 million (GBP 410 million) from defendants including the Holy See and its Vatican Bank, claiming that they knew about the fraud and failed to stop it. The commissioners' efforts threaten to bust open one of the world's most secretive banking operations.

The action in Mississippi has been launched using America's racketeering legislation. The writ runs to 63 pages. It claims that Frankel, with the connivance of Edward Collins, a retired vice-chairman of Britain's Hanson Trust, and a string of senior church figures including a former Papal Nuncio to the US, used the good name of the Holy See to try to bluff regulators.

Frankel's frauds started in 1990. He built up a web of companies and trusts to gain control of 11 insurance firms in Mississippi, Missouri, Oklahoma, Tennessee and Arkansas. Each year he filed fake accounts showing the firms all had assets safely invested in blue-chip stocks, government bonds and property.

In reality, Frankel was emptying accounts and using the proceeds to live a jet-set life. He bought the 12-bedroom mansion in Greenwich, Connecticut, and had up to a dozen girlfriends set up in homes nearby.

It appears from the writ that Mississippi insurance regulators eventually saw through him. In early 1999 they requested details of the St Francis of Assisi Foundation to Serve and Help the Poor and Alleviate Suffering. The foundation, which, it was claimed, was backed by the Vatican, was trying to buy the Colorado Life Insurance Company (Clico).

At first, the story seemed to check out. A letter from Monsignor Emilio Colagiovanni, a judge emeritus in one of the Vatican's three top courts, explained that while the foundation was not based in or run by the Vatican, it was funded by the Vatican's Monitor Eclesiasticus Foundation (MEF), an arm of the Vatican's court and run by the Vatican Bank.

But the answers were not good enough for regulators. In 1999, a hearing at which Colagiovanni appeared in priest's robes failed to convince Mississippi insurance commissioner George Dale - and Frankel went on the run.

Far from being a charitable body, the St Francis Foundation was set up by Frankel with the connivance of Colagiovanni, according to the writ.

Frankel had allegedly also enmeshed Edward Collins, who had retired to California after being vice-chairman of Hanson Trust.

Introduced to Collins as 'David Rosse', Frankel allegedly persuaded him to front the bid for Clico. According to the Mississippi writ, Collins claimed to be worth over $ 200 million and said he wanted to buy insurance firms to make charitable donations. In exchange, the writ says, he received payments including up to $ 50,000 in air fares.

Frankel had also enlisted bigger guns. He decided that if it could be claimed that the Vatican was buying an insurance firm, few questions would be asked.

Introduced, allegedly, to Colagiovanni as Rosse, he said he wanted to secretly control a corporation and proposed that $ 55 million be given to the Vatican. It would keep $ 5 million but the rest would covertly remain under Frankel's control in a Vatican foundation.

'Our agreement will include the promise that the Vatican will aid me in my efforts to acquire insurance companies by allowing Vatican officials to certify to the authorities if necessary that the source of funds for the foundation is the Vatican,' Frankel wrote.

Colagiovanni, according to the writ, won approval from Bishop Franco Salerno, economic secretary in the Vatican finance department and a member of the board of MEF.

Colagiovanni is also claimed in the writs to have consulted the third highest Vatican official, Sostituto Giovanni Cardinal Re. The plan was also discussed with former US Papal Nuncio Pio Cardinal Laghi.

But there were misgivings and, instead of a Vatican foundation, the St Francis Foundation was created - outside the Vatican's control but funded by a charity related to it. In fact, the funds were all from Frankel's Swiss bank account.

After the fraud was uncovered, the Vatican said in a statement that MEF and the St Francis Foundation 'do not have Vatican juridicial character'. MEF 'had always acted outside of any Vatican context'.

Collins could not be contacted this weekend.