By Emilio Parodi and Lisa Jucca
MILAN (Reuters) - Twenty years after the "Clean Hands" graft scandal swept away Italy's old political system and sent hundreds of people to jail, corruption in the euro zone's third largest economy is worse than ever and has seeped deep into society.
"Illegality, corruption...are still notably present in the country," Luigi Giampaolino, head of Italy's audit court, said in a major speech on Thursday.
Officials say that corruption costs 60 billion euros a year, around the size of Italy's budget deficit. According to audit court figures, the sum is about half the estimated cost of corruption in the whole of the European Union.
"Corruption is ever wider and reaches ever deeper," said Milan Deputy Chief Prosecutor Alfredo Robledo, who heads a pool of anti-corruption magistrates -- heirs of the elite group that led the famed 'Bribesville' probes two decades ago.
That probe, which shook Italy, began on February 17, 1992, when senior Socialist Party member Mario Chiesa was caught pocketing a 3,500 euro kickback.
The subsequent scandal not only sent hundreds to jail but forced the most prominent figure of the time, Socialist leader Bettino Craxi, into exile in Tunisia where he died. Dozens of people implicated in graft probes committed suicide.
The dominant Christian Democrat party, which had dominated Italy since World War Two, disintegrated.
The scandal created a vacuum into which billionaire media magnate Silvio Berlusconi swept in 1994, dominating Italian politics until last November when he was forced out by the euro zone debt crisis. He was replaced by technocrat Mario Monti, widely seen as an "anti-politics" new broom.
But hopes of a new, cleaner Italy have been dashed since Clean Hands captivated Italians. Magistrates and experts say a backlash against what many saw as overzealous, leftwing judges, resulted in the dismantling of laws against corruption.
Robledo is deeply disillusioned. "I continue to do my job to the best of my abilities, out of a sense of duty. But I no longer believe in justice," he told Reuters.
"We diagnosed an illness but they treated us, instead of the sickness," said Antonio Di Pietro, most famous of the Clean Hands pool, who now runs an opposition party.
GRAFT SPREADS EVERYWHERE
Graft, once used to finance political parties, now permeates society for private gain, with bribes routine.
"It's as if there has been a diffusion, an atomization of the phenomenon. It's like you have broken a vase of sand and it has spread everywhere," Robledo said in an interview at his office at Milan's austere courthouse.
He told the story of Giovanni Calabrese, 54, a low level municipal official arrested a few weeks ago, who extorted 100 euro bribes by alleging local shop signs broke regulations.
"His justification was that he could not make ends meet," Robledo said. "In the past, someone like him would have done a bit of black market work or something similar. But now this person, for a mere 100 euros, is ... risking his job, his salary and ending up on the street."
Edoardo Austoni, a former head of the urology department at Milan's public San Giuseppe Hospital was convicted in 2009 for demanding between 1,500 and 2,500 euros to speed up urgent prostate surgery on cancer patients. He is appealing against a 6-1/2 year jail sentence.
"The professor diagnosed a prostate tumor. I needed an immediate operation...it would be possible if I paid 1,500 euros. I paid in cash," said one of the patients, who did not want to be identified.
Corruption, magistrates say, has spread across the country. Major scandals involving politicians from across the spectrum are still making almost daily headlines.
In one of many, Filippo Penati, a former centre-left president of Milan province, is among several people under investigation for corruption in a 200 million euro development of a huge former steel works on the outskirts of Milan. He denies any wrongdoing.
Berlusconi himself, who constantly denounces leftwing magistrates, currently faces two trials for financial crimes or corruption, among more than 20 court cases in his political career that have never ended in conviction.
Opponents accuse him of encouraging a climate of tolerance as well as presiding over a weakening of the laws against graft.
According to Transparency International, an international organization that monitors corruption, Italy ranks 69 out of 182 countries-ahead only of Greece, Romania and Bulgaria in Europe.
"Like a very advanced virus, corruption has adapted and evolved," says Walter Forresu, from TI's Italian branch.
Economist and anti-corruption expert Marco Arnone says Clean Hands initially improved Italy's image but not for long.
"The Clean Hands operation showed foreign investors that Italy was a reliable country, that there was an inner mechanism of antibodies," says Arnone, a Director at the Centre for Macroeconomics & Finance Research.
"But from 2001 there was a progressive worsening."
Experts and magistrates say that in the last two decades legal bulwarks against graft have been gradually undermined.
The statute of limitations on corruption crimes has been halved to 7.5 years, greatly reducing the chances that offenders will go to jail under Italy's tortuous legal system.
Magistrate Robledo said accounting fraud has effectively been decriminalized in what he called "a real tragedy."
"How can you be credible with foreign investors when they know that fraudulent accounting will not be prosecuted? What are the guarantees? What are the rules?" he asked.
Gian Gaetano Bellavia, an expert in corruption who advises prosecutors, told Reuters that successive governments "have carried out a long maneuver for more than 15 years which made the justice system inefficient especially for economic crimes.
"This paralyzed punitive criminal action and led to a great growth of corruption and extortion," he said.
Lucio Lucia, a lawyer who has defended many prominent figures accused of white collar crime said Italy's complex legal and administrative systems encouraged petty officials to create obstacles and demand bribes to speed up procedures.
Robledo believes only a profound change to a less selfish, more ethical society with a common vision of the future, accompanied by a streamlining of the legal system will effectively combat corruption.
"If you don't plough the field, the weeds will come back. Politicians must fill this role, not the magistrates," Di Pietro added.
(Additional reporting by Paola Arosio; editing by Barry Moody and Jon Boyle)