Digital Financial Inclusion and Money-Laundering Risk: Cross-Sectional Evidence from the Basel AML Index 2025

In the modern financial world, money rarely moves as physical cash. It flows through digital rails: bank accounts, mobile phone wallets, and instant payment apps. This shift has sparked a hopeful idea among policymakers and regulators: that moving money online makes it harder to hide. The logic is straightforward. When you hand over a stack of bills, the transaction leaves no trace. But when you send money digitally, a record is created automatically. This digital paper trail, the theory goes, acts as a constant spotlight, making it difficult for criminals to wash dirty money without being seen. Consequently, many international efforts to expand access to banking and digital payments are justified by the belief that these tools will naturally clean up the financial system and reduce the risk of money laundering.

However, a new study challenges this optimistic view by asking a more difficult question: does the technology itself do the work, or does it simply reveal the quality of the system it runs on? The research, led by Anas Al Qudah at Yarmouk University, examines whether the adoption of financial technology actually lowers the risk of money laundering across different countries. To understand the answer, one must look at the concept of "institutional quality." This refers to the strength of a country's laws, the fairness of its courts, and the effectiveness of its police and regulators. In a country with strong institutions, rules are enforced consistently, and officials act with integrity. In a country with weak institutions, rules may exist on paper but are ignored in practice. The study investigates whether digital payments can fix a broken system on their own, or if they only work when the system is already functioning well.

The researchers gathered data from 177 different jurisdictions, combining a new global risk score for money laundering with statistics on how many people in those countries use digital financial tools. They looked at three specific measures of technology use: how many adults own a bank account, how many use mobile money services, and how many make or receive digital payments. They then compared these numbers against the money-laundering risk scores, while carefully accounting for how rich a country is and how many people have access to the internet. The goal was to see if the technology itself was the cause of lower risk, or if the risk was actually driven by the underlying strength of the country's legal and regulatory framework.

The findings reveal a clear and surprising pattern. At first glance, the data seems to support the popular narrative. Countries with higher rates of digital payment adoption do indeed have lower money-laundering risk scores. This initial link is strong and statistically significant. However, this relationship disappears the moment the researchers account for the quality of the country's institutions. When they added a measure of the "rule of law"—which captures how well a country enforces its laws and protects property rights—the connection between technology and lower risk vanished. In countries with weak rule of law, having more digital payments did not lower the risk score. In countries with strong rule of law, the risk was already low, regardless of how much technology was used.

This result suggests that the technology is not an independent shield against crime. Instead, the ability to detect and stop money laundering depends almost entirely on the "guardians" of the system: the regulators, judges, and law enforcement officers who monitor the digital trails. If a country has strong institutions, the digital records generated by fintech are useful because someone is there to read them and act on them. If a country has weak institutions, the digital records exist, but no one with the power to enforce the rules is using them effectively. The study found that the strength of a country's legal system was the dominant factor in predicting money-laundering risk, far outweighing the impact of how many people used mobile money or digital payments.

The researchers tested this conclusion in several ways to ensure it was not a fluke. They looked at different parts of the risk distribution, checking if the technology helped only the safest countries or only the riskiest ones, and found no evidence of such a split. They also corrected for the fact that data on mobile money was missing for many countries, particularly in regions where the technology is most common, and the result remained the same. The study also noted a subtle but important detail about how the risk scores are calculated. The global index used to measure money-laundering risk includes measures of corruption and the rule of law as part of its own formula. This means that part of the reason the technology link disappeared is that the risk score is partly built from the very institutional factors the researchers were testing. Even after accounting for this mechanical overlap, the core finding held: institutional quality is the primary driver of safety, not the digitization of payments.

One crucial limitation of the study is that it focuses on conventional financial technology, such as bank accounts and standard mobile money apps. It does not cover the newer, faster-growing world of virtual assets and cryptocurrencies, which operate in a different, often less regulated space. The researchers acknowledge that the risks associated with these new digital assets might follow different rules, but their data cannot yet measure that specific channel. For the vast majority of the financial system that relies on regulated banks and mobile networks, however, the evidence is clear. Adopting digital payment tools does not automatically make a country safer from money laundering.

The study concludes that treating digital adoption as a standalone solution to financial crime is a mistake. Donors and policymakers who push for more mobile money or digital accounts as a way to improve anti-money laundering defenses should be cautious. The technology is a tool, not a substitute for governance. Without strong laws, independent courts, and effective regulators to enforce the rules, the digital trail is just a record of a crime that no one is stopping. The path to a safer financial system lies not in the speed of the transaction, but in the strength of the institutions that oversee it.