The Vatican, a Chelsea property deal and Brexit

In 2012, private bankers at Credit Suisse arranged a meeting at their Canary Wharf offices in London that required even more discretion than usual. There a representative of one of their most secretive clients sat down with a man claiming to be able to perform miracles with money.

The client, an ultra-high net worth European account, had been studying an investment into a risky oil project in Africa, and the stylish Italian financier was there to offer his expert advice.

After a year of deliberations the Italian had returned with his opinion. The oil investment would not be profitable, but instead he could put a new, far more lucrative opportunity on the table: selling the client a stake in his own luxury property development in one of London’s most exclusive neighbourhoods.

By 2014 a total of $200m had been wired from accounts at Credit Suisse and Banca della Svizzera Italiana (BSI), a Lugano-based private bank, to the Italian financier’s holding company in Luxembourg.

The ultra-high net worth client was none other than the Secretariat of State for the Vatican — custodian of hundreds of millions of charitable donations from the Catholic faithful around the world for the poor and needy.

60 Sloane Avenue in Chelsea, London, photographed on October 13, 2019.

The luxury property in Chelsea, 60 Sloane Avenue, in which the Vatican invested © Tolga Akmen/FT

As a result of the investment, the Secretariat was now the part owner of a scheme to build 49 luxury apartments in London’s Chelsea — a speculative development plan that was made even riskier after Britain’s vote to leave the EU in 2016 sent shivers through the capital’s prime real estate market.

This month cardinals were left stunned when the Vatican’s own police raided the offices of the Secretariat — the central bureaucracy of the Holy See — to seize financial documents and computers, while five members of staff were suspended.

That same week Pope Francis drafted in Giuseppe Pignatone, one of Italy’s most feared anti-mafia judges who helped bring down the capo of the Sicilian Cosa Nostra, Bernardo Provenzano, as head of the Vatican’s prosecution service.

The Vatican has declined to comment on why it staged the unprecedented raid on its own offices beyond a statement that it is probing suspicious financial transactions “carried out over time”.

The Financial Times has been able to establish through interviews and financial documents that the investigation is focused on how the Vatican Secretariat entered into a complex London real estate deal that was blown off-course by Brexit.

Flow chart showing the Vatican’s money trail to prime London property

The deal, which saw the Secretariat buy a minority stake in 60 Sloane Avenue in Chelsea through an offshore structure of funds and companies, realised £138m in profit for Raffaele Mincione, the Italian former banker and family office manager who put the deal together and managed it on the Vatican Secretariat’s behalf.

Last year, with the UK luxury property market shaken by political uncertainty, the development was forced to refinance its debts with a London hedge fund. In November 2018 the Vatican Secretariat issued a demand to Mr Mincione to buy the Chelsea building outright — setting in motion the events that would lead to the police raids at the heart of the Holy See this month.

The Vatican raid, insiders say, is a rare public glimpse of a fierce battle inside the Holy See, with a faction of cardinals resisting attempts by Pope Francis to sort out and centralise its sprawling finances after decades of scandals and embarrassment for the Church.

The Secretariat’s bet on London real estate was made with funds held away from the Vatican bank, the Institute for Religious Works, which since 2013 has published an annual report of its €5.3bn of assets in an effort to show progress after past money laundering cases.

In a statement, Mr Mincione’s investment company WRM said the Vatican Secretariat had been advised in all of its dealings with the fund by Credit Suisse, and all its transactions with the Secretariat were transparent and audited.

LONDON, ENGLAND - OCTOBER 03: Raffaele Mincione and Kadee Ratibor attend the launch of M Industry London and the Art Bag at 51 Berkeley Square on October 3, 2017 in London, England. (Photo by David M. Benett/Dave Benett/Getty Images for M Industry London)

The Italian financier Raffaele Mincione, who persuaded the Secretariat of State for the Vatican to invest in a luxury property development in Chelsea © David Benett/Getty

“We have no inside knowledge of these investigations or the circumstances that led to them. We are secure and confident in the knowledge that no wrongdoing or improprieties were conducted by the WRM group or any of its companies,” it said. Credit Suisse declined to comment.

Details of the London property deal raise questions over the actions of Giovanni Angelo Becciu, now a cardinal and at the time of the investment the substitute for general affairs of the Secretariat, its second highest ranking official and in effect chief of staff to the pope.

It was in this role, which made him one of the most powerful figures inside the Holy See reporting daily to Pope Benedict and later Pope Francis, that Cardinal Becciu signed off on the investment after meeting Mr Mincione at the Vatican. Cardinal Becciu, through his office, declined to comment.

Mr Mincione was not the typical company that a man of the Church such as Cardinal Becciu might be expected to keep. Born in Pomezia, 30km outside the centre of Rome in 1965, Mr Mincione moved to London in the 1980s, where he worked selling bonds and derivatives in various investment banks and developed a reputation among his colleagues as something of a playboy.

Having briefly attracted British press attention for dating the model Heather Mills in the early 1990s after meeting her in the London nightclub Stringfellows, ex-colleagues said Mr Mincione showed a penchant for taking large, risky bets. “He made a lot of money, and spent a lot of money,” says one.

During the Russian financial crisis of the late 1990s he used his bonus money to buy up Gazprom bonds at distressed prices, making several million pounds in profit when they were eventually paid out at full value.

Chart showing how the Vatican made a profit on Chelsea property

He hit the British press again after buying a large period house in London’s Knightsbridge for what was reported as a knockdown price of £18m in 2009. He commented to a newspaper that “in a very uncertain time there is no bargain”.

Mr Mincione’s biggest bet was yet to come. In 2012 he established a Jersey registered company called 60SA, arranged a £75m loan from Deutsche Bank, and for £129m bought 60 Sloane Avenue, a large building located a few minutes’ walk away from the house he had snapped up in the financial crisis.

The building’s terracotta-façade had been originally built by Harrods as a motor car showroom but now housed offices and shops on the ground floor. If the building could be demolished and rebuilt into flats while keeping the historic façade, Mr Mincione reasoned, he would stand to make hundreds of millions of pounds in profits.

Why Cardinal Becciu, and his advisers at Credit Suisse, were attracted to the terms of Mr Mincione’s offer to invest in his Chelsea luxury property plan remains unclear.

The investment signed off by Cardinal Becciu saw Mr Mincione transfer a stake in his London property to a fund he set up especially for the Secretariat as its sole client. He then transferred shares in the building to the new Vatican fund at a price that more than tripled the money he had invested in the property less than two years after buying it.

VATICAN CITY, VATICAN - JUNE 28: Newly appointed Cardinal Giovanni Angelo Becciu poses after a consistory ceremony lead by Pope Francis to create 14 new cardinals at St. Peters Basilica on June 28, 2018 in Vatican City, Vatican. (Photo by Alessandra Benedetti - Corbis/Corbis via Getty Images)

Cardinal Giovanni Angelo Becciu signed off on the property deal when he was in effect the pope’s chief of staff © Corbis/Getty

In June 2014, one month before the Vatican deal, accounts show that the value of the equity in 60 Sloane Avenue was sharply revised higher after an appraisal. Based on a new valuation by CBRE the value of the equity in the building was increased to £137.66m, or more than three times the £40m Mr Mincione had put down in December 2012 and representing a paper profit of £97.66m in just 19 months.

The following month, Mr Mincione sold the fund he managed for the Vatican a 45 per cent stake in the equity of 60 Sloane Avenue at the new valuation, while he cashed out more than the value of his entire initial investment. The Vatican would not own shares in the property directly, but only through its investment in Mr Mincione’s fund, which in turn owned the majority of the equity in the building. At the time of the sale to the Vatican he had not received planning permission from Kensington & Chelsea council for the conversion.

As a result of the deal structure, the Secretariat paid millions in performance fees to Mr Mincione, who charged a 2 per cent management fee and 20 per cent on profits. The Vatican funds were also used to buy unrated bonds in Mr Mincione’s own holding company, allowing him to use the cash to finance his own personal investments.

Mr Mincione, through WRM, said the valuation increase just before the Secretariat bought its stake was decided by CBRE as an independent consultant, and audited by Deloitte. The value of the London building had risen considerably since he bought it near the bottom of the market during the European debt crisis in 2012, and the hedge fund-style fees charged were normal because of the complex planning process involved.

WRM said the investments of the Secretariat’s money in the debt of Mr Mincione’s holding company were “made in full transparency with the investor and its advisers”, as well as with the fund’s regulators in Luxembourg.

By 2016, after finally receiving planning permission from Kensington & Chelsea, it appeared as if his large, leveraged bet on prime London property, financed by the Vatican, was about to pay off. Then Britain voted to leave the EU. The project now had to refinance its debt while facing a far colder market. Since 2016, prime London property prices are down 10.4 per cent, according to data provider LonRes.

With 60 Sloane Avenue now a development project, rather than a simple office building, it was considered more risky by lenders. To refinance, Mr Mincione turned to the London hedge fund Cheyne Capital, which provided him with a higher interest loan in April 2018.

Pope Francis leaves the morning session of the Amazon synod, at the Vatican, Saturday, Oct. 12, 2019. Pope Francis is holding a three-week meeting on preserving the rainforest and ministering to its native people as he fended off attacks from conservatives who are opposed to his ecological agenda. (AP Photo/Alessandra Tarantino)

Pope Francis brought in Giuseppe Pignatone, one of Italy’s top anti-mafia judges, to invesigate the property deal © Alessandra Tarantino/AP

Later that year, back in Vatican City, something important had changed. Angelo Becciu had moved from the Secretariat after being promoted to the status of cardinal by Pope Francis.

Senior Vatican figures were no longer happy with owning a minority stake in 60 Sloane Avenue, and by the summer of 2018 the Secretariat dispatched an official to London to inform Mr Mincione that he would have to sell the entire building to them immediately.

By November the Secretariat had bought the building outright. The precise amount paid is hard to establish because of a complex asset swap involved in the transaction, and currency movements.

Based on a cash payment made by the Secretariat of £40m offered in the swap, and the sum of its $200m original investment in 2014 at exchange rates in that year, the Secretariat ended up paying £168m for Mr Mincione’s shares in the building, making him a £128m profit. The Vatican also took on the development’s £100m of debt, now owed to a London hedge fund. Work on demolishing the building to rebuild it into luxury flats had still not begun.

The Secretariat, however, now needed to refinance the expensive debt attached to the property. One person familiar with the situation said the Secretariat turned to the Vatican bank for a loan, triggering scrutiny of the deal that eventually resulted in the raids and suspensions this month.

Two of the Secretariat officials suspended by the Vatican had earlier been appointed as directors of a new company established in the UK in 2019 to hold the Secretariat’s ownership of the 60 Sloane Avenue building.

One of these, Mauro Carlino, served as secretary to Cardinal Becciu during his time at the Secretariat. Mr Carlino could not be reached for comment through the Vatican.

For the Vatican, questions remain over the oversight of an unknown number of accounts and investment funds believed to be held outside the control of the Papal State’s bank, or its centralised investment funds. The money invested with Mr Mincione by the Secretariat came from a pool of capital that is estimated by one person with knowledge of it to be at least $800m. That account is believed by some to be just one of many side-pockets of cash controlled by different Vatican entities.

While the efforts made by Pope Francis to demonstrate that the steps being taken to sort out the Holy See’s finances are more focused than those of his predecessors, there are signs that they have been repeatedly frustrated.

In 2017 Libero Milone, the former chairman of Deloitte in Italy who had been hired as the Vatican’s first ever auditor, resigned from his post just two years into the job. Mr Milone said at the time that his attempts to gather financial information angered powerful figures within the Church. He claimed that before his exit he was presented by Vatican police with trumped-up charges of spying and embezzlement, and told to sign a letter of resignation on the spot.

Cardinal Becciu said at the time of Mr Milone’s claims that the auditor had broken Vatican rules and “was spying on the private lives of his superiors and staff, including me. If he had not agreed to resign, we would have prosecuted him.” All charges against Mr Milone were eventually dropped. No replacement has been named.

Whether the Vatican under Francis can finally put its own house in order may come to define a liberalising Papacy that has strived to refocus the Church on the needs of the poor.

Meanwhile the Secretariat, now the owner of 122,000 square feet of prime London real estate, is exposed to the whims of Britain’s chaotic politics.

“We have the bad effects of Brexit, a softer market,” says one insider. “The only way to ride out the storm is with strong hands”.

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