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How the Vatican's finances work

Pope Francis leads a mass at the Sistine Chapel at the Vatican on March 14, 2013, a day after his election.
Pope Francis leads a mass at the Sistine Chapel at the Vatican on March 14, 2013, a day after his election.L'Osservatore Romano / AFP - Getty Images

As Pope Francis assumes leadership of the world's 1.2 billion Catholics, he's got his work cut out for him on many fronts, not the least of which is the Vatican's finances.

Last year, a sheaf of documents was leaked by Pope Emeritus Benedict XVI's former butler in a scandal known as the Vatileaks affair. The documents allegedly showed, for example, tens of millions of dollars in transfers to American dioceses to help pay legal settlements -- estimated to have cost the American church more than $3 billion so far -- surrounding the priest sex-abuse scandals.

During his eight-year tenure, Benedict reportedly made progress toward reforming the Vatican Bank, replacing its president and creating a financial-intelligence committee. But by most accounts, the Vatican Bank still needs greater scrutiny and transparency.

So what is the Vatican Bank, and how is it related to the Catholic Church, and to the finances of Vatican City, a sovereign state? CNBC explains.

What is the Vatican Bank?
It's definitely not your average bank. Officially called the Institute for the Works of Religion, the Vatican Bank is a privately held firm run by a CEO who reports to a committee of cardinals and the Pope. It offers ATMs with transactions in Latin and boasts a small castle-like headquarters protected by Swiss Guards.

It has about 33,000 accounts, a distribution network in more than 100 countries, and an estimated $8 billion in assets. (By contrast, JPMorgan Chase, the largest U.S. bank, has about $2 trillion in assets.)

Details of the account holders are private, though the Vatican says most of the accounts belong to members of the clergy. Because its assets are not the property of the Holy See, it isn't overseen by the Vatican; instead it's considered a charitable foundation affiliated with the Vatican.

What's the controversy about the Vatican Bank?
Where do we begin? It's been controversial for decades, accused of money-laundering and collaborating with the mafia, and before that with the Nazis.

In 1982, the Vatican Bank dealt with its most serious crisis. Roberto Calvi, known as "God's Banker," was found dead, hanging from Blackfriars Bridge in London. At first his death appeared to be a suicide, but eventually five people -- including a mafia member -- were charged with his murder. Calvi was chairman of Banco Ambrosiano, which collapsed after $1.3 billion in loans disappeared; the loans had been made to dummy companies owned by the Vatican Bank, and the Vatican had provided the letters of credit.

More recently, in 2010, the Italian government launched an investigation into the bank's operations after the Bank of Italy alerted police to two suspicious Vatican Bank transactions totaling $30 million. The money was being sent from Credito Artigianato to JP Morgan Chase and another Italian bank, Banca del Fucino. The Vatican Bank apparently didn't disclose the origin of the money, which is a violation of Italian law. Ultimately, the bank denied wrongdoing and the funds were eventually released.

In December 2010, Benedict XVI established the Financial Information Authority as an independent agency to monitor the financial activities of the Vatican Bank and other Vatican-related institutions. Benedict also worked to get the Vatican on to the Organization of Economic Co-operation and Development's "white list" of countries that follow international banking standards.

But the 2012 release of leaked documents — the Vatileaks affair — showed the bank was still struggling with corruption, apparently transferring tens of millions of dollars to American dioceses to help them pay child sex-abuse legal bills. There was also a letter from a senior Vatican official, Archbishop Carlo Maria Vigano, in which he apparently complained of money-laundering and corruption in the Vatican.

Last May, the bank's president, Ettore Gotti Tedeschi, was ousted by the board of directors, accused of money-laundering and not following laws that block financing terrorists and criminal gangs. Tedeschi countered, saying he was fired for getting "too close to the truth."

In January, Italy stopped allowing its banks to do business with the Holy See because of the Vatican Bank's lack of financial transparency. As a result, the Italian banks cut off credit-card processing at tourist spots such as the Sistine Chapel. Some weeks later, plastic was restored after a Swiss firm that doesn't have to abide by EU banking laws came to the rescue.

Then, just before he abdicated the papacy in February, Benedict appointed a new Vatican Bank president, Ernst von Freyberg, a German-born lawyer.

How does this mess impact Pope Francis?
The cardinals will expect Francis to clean up the scandal and modernize the church's finances. If he doesn't, the Vatican could possibly have no access to the global banking system. That situation would undermine its moral authority and its financial stability.

But it won't be easy, because the Vatican hierarchy is divided into various factions. Some want the church's finances to be more transparent to the faithful and the banking world; others want to keep the church's tradition of secrecy.

Related: What Pope Francis can teach CEOs about leadership

So how is the Vatican Bank's finances different from the Catholic Church's?
The church in this context is called the Holy See, which includes the offices of the Roman Curia (the church bureaucracy that makes the wheels turn) and its communications outlets.

In 2011, the Holy See brought in $308 million in revenue, with $326 million in expenditures, for a deficit of about $18 million, according to Catholic News Service.

The budget of the Holy See includes the Vatican Secretariat of State and its diplomatic missions around the world, Vatican councils, the Holy See's investment portfolio and properties, plus the Vatican's newspaper, radio, publishing house and television production.

Most of the Holy See's expenditures were related to personnel costs for about 2,800 employees.

Its revenues included about $61 million from the Vatican bank, which donates its investment profits, contributions from dioceses and religious orders, and financial investment returns.

The United States, Germany and Italy give the biggest contributions every year, according to the Vatican.

How are the Vatican Bank's finances and the Catholic Church's finances different from Vatican City's finances?
Vatican City has its own economy supported by contributions from Roman Catholics around the world, and the sale of postage stamps, tourist fees and mementos.

In 2011, Vatican City's revenues were $113 million, with a surplus of about $27 million, according to Catholic News Service.

Since 2002, its currency has been the euro.