Does digital payments reduce the risk of money laundering? The role of financial sector development
DOI: https://doi.org/10.3846/jbem.2025.24402Abstract
This study examines how financial sector development mediates the relationship between digital payments and money laundering. The current study relies on a sample of 120 countries, including both developed and developing economies, for the years 2014, 2017, and 2021. The findings reveal that digital payments, the rule of law, and political stability reduce the risk of money laundering, indicating that the increased use of digital payments helps reduce the risk of money laundering. This suggests that digital transactions, being more traceable and transparent than cash transactions, can help authorities monitor and prevent illicit financial activities more effectively. Regarding the mediation effect of financial sector development, the results show that financial sector development and the rule of law positively affect the density of digital payment transactions. In addition, it revealed that money-laundering risk is lower when the financial system develops and compliance with laws and political stability. These findings provide actionable insights for policymakers, regulators, and financial institutions committed to strengthening anti-money laundering efforts.
Keywords:
digital payment, financial sector development, money laundering risk, role of law, political stability, developed economies, developing economiesHow to Cite
Share
License
Copyright (c) 2025 The Author(s). Published by Vilnius Gediminas Technical University.
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Adekeye, K. S., Igwe, K. E., & Olayiwola, O. M. (2021). On pooled OLS and panel regression models for assessing the contributions of electronic payment system on commercial banks profitability. Journal of Statistics: Advances in Theory and Applications, 25(2), 61–81. https://doi.org/10.18642/jsata_7100122206
Afonso, A., & Blanco-Arana, M. C. (2024a). Does financial inclusion enhance per capita income in the least developed countries? International Economics, 177, Article 100479. https://doi.org/10.1016/j.inteco.2024.100479
Afonso, A., & Blanco-Arana, M. C. (2024b). The nexus between economic freedom and economic growth in the least developed countries. An empirical analysis for the period of 2000–2021. Czech Journal of Economics and Finance (Finance a uver), 74(2), 191–220. https://doi.org/10.32065/CJEF.2024.02.02
Akartuna, E. A., Johnson, S. D., & Thornton, A. E. (2023). The money laundering and terrorist financing risks of new and disruptive technologies: A futures-oriented scoping review. Security Journal, 36(4), 615–650. https://doi.org/10.1057/s41284-022-00356-z
Akisik, O. (2020). The impact of financial development, IFRS, and rule of LAW on foreign investments: A cross-country analysis. International Review of Economics & Finance, 69, 815–838. https://doi.org/10.1016/j.iref.2020.06.015
Al Kurdi, B., Antouz, Y. A., Alshurideh, M. T., Hamadneh, S., & Alquqa, E. K. (2023). The impact of digital marketing and digital payment on financial performance. In 2023 International Conference on Business Analytics for Technology and Security (ICBATS). IEEE. https://doi.org/10.1109/ICBATS57792.2023.10111143
Alexander, K. (2001). The international anti‐money‐laundering regime: the role of the financial action task force. Journal of Money Laundering Control, 4(3), 231–248. https://doi.org/10.1108/eb027276
Alexandre, C. R., & Balsa, J. (2023). Incorporating machine learning and a risk-based strategy in an anti-money laundering multiagent system. Expert Systems with Applications, 217, Article 119500. https://doi.org/10.1016/j.eswa.2023.119500
AlQudah, A., Bani‐Mustafa, A., Nimer, K., Alqudah, A. D., & AboElsoud, M. E. (2022). The effects of public governance and national culture on money laundering: A structured equation modeling approach. Journal of Public Affairs, 22, Article e2796. https://doi.org/10.1002/pa.2796
Aluko, A., & Bagheri, M. (2012). The impact of money laundering on economic and financial stability and on political development in developing countries: The case of Nigeria. Journal of Money Laundering Control, 15(4), 442–457. https://doi.org/10.1108/13685201211266024
Amara, I., Khlif, H., & El Ammari, A. (2020). Strength of auditing and reporting standards, corruption and money laundering: a cross-country investigation. Managerial Auditing Journal, 35(9), 1243–1259. https://doi.org/10.1108/MAJ-10-2018-2026
Amjad, M. M., Arshed, N., & Anwar, M. A. (2021). Money laundering and institutional quality: The case of developing countries. In A. Rafay (Ed.), Money laundering and terrorism financing in global financial systems (pp. 91–107). IGI Global. https://doi.org/10.4018/978-1-7998-8758-4.ch004
Antonijević, M., Ljumović, I., & Lukić, V. (2021). Are digital financial payments constrained by the country’s income? Evidence from the Global Findex database. Anali Ekonomskog fakulteta u Subotici, 57(46), 115–129. https://doi.org/10.5937/AnEkSub2146115A
Antwi, S., Tetteh, A. B., Armah, P., & Dankwah, E. O. (2023). Anti-money laundering measures and financial sector development: Empirical evidence from Africa. Cogent Economics & Finance, 11(1), Article 2209957. https://doi.org/10.1080/23322039.2023.2209957
Arefjevs, I., Spilbergs, A., Natrins, A., Verdenhofs, A., Mavlutova, I., & Volkova, T. (2020). Financial sector evolution and competencies development in the context of information and communication technologies. Research for Rural Development, 35, 260–267. https://doi.org/10.22616/rrd.26.2020.038
Blanco-Arana, M. C. (2020). Socio-economic factors on the evolution of mortality in Europe in the XXI century: Policy proposals to face the COVID-19 Crisis. Revista de Economía Mundial, (56), 99–114. https://doi.org/10.33776/rem.v0i56.4854
Bakyashri, S., & Jeyadevi, C. (2024). Financial markets and digital economy. IPE Journal of Management, 14(15), 63–68.
Baldwin, G. (2003). The new face of money laundering. Journal of Investment Compliance, 4(1), 38–41. https://doi.org/10.1108/15285810310812997
Bandura, W. N. (2022). Financial openness, trade openness and financial development: Evidence from sub-Saharan Africa. Development Southern Africa, 39(6), 947–959. https://doi.org/10.1080/0376835X.2021.1988517
Basaran-Brooks, B. (2022). Money laundering and financial stability: Does adverse publicity matter? Journal of Financial Regulation and Compliance, 30(2), 196–214. https://doi.org/10.1108/JFRC-09-2021-0075
Bayar, Y., & Aytemiz, L. (2015). Impact of economic freedom, political stability and economic growth in the USA on emerging Asian economies. Actual Problems of Economics, 168(6), 62–73.
Berg, A. (2020). The identity, fungibility and anonymity of money. Economic Papers: A Journal of Applied Economics and Policy, 39(2), 104–117. https://doi.org/10.1111/1759-3441.12273
bin Zul Kepli, M. Y., & Zulhuda, S. (2019). Cryptocurrencies and anti-money laundering laws: The need for an integrated approach. In U. A. Oseni, M. K. Hassan, & R. Hassan (Eds.), Emerging issues in Islamic finance law and practice in Malaysia (pp. 247–263). Emerald Publishing Limited. https://doi.org/10.1108/978-1-78973-545-120191020
Bodescu, C. N., Achim, M. V., & Rus, A. I. D. (2022). The influence of digital technology in combating money laundering. In 24th RSEP International Conference on Economics, Finance & Business (pp. 100–105). https://www.fincrime.net/storage/app/uploads/public/622/4fa/752/6224fa7522af1277783540.pdf
Brüderl, J., & Ludwig, V. (2015). Fixed-effects panel regression. In H. Best & C. Wolf (Eds.), The Sage handbook of regression analysis and causal inference (pp. 327–357). SAGE Publications. https://doi.org/10.4135/9781446288146.n15
Caulkins, J. P., & Reuter, P. (2022). How much demand for money laundering services does drug selling create? Identifying the key parameters. International Journal of Drug Policy, 103, Article 103652. https://doi.org/10.1016/j.drugpo.2022.103652
Choo, K.-K. R. (2013). New payment methods: A review of 2010–2012 FATF mutual evaluation reports. Computers & Security, 36, 12–26. https://doi.org/10.1016/j.cose.2013.01.009
Compin, F. (2018). Terrorism financing and money laundering: Two sides of the same coin? Journal of Financial Crime, 25(4), 962–968. https://doi.org/10.1108/JFC-03-2017-0021
De Koker, L. (2016). Money laundering compliance – the challenges of technology. In M. Dion, D. Weisstub, & J. L. Richet (Eds.), Financial crimes: Psychological, technological, and ethical issues (pp. 329–347). Springer. https://doi.org/10.1007/978-3-319-32419-7_16
Dima, B., Barna, F., & Nachescu, M.-L. (2018). Does rule of law support the capital market? Economic Research-Ekonomska Istraživanja, 31(1), 461–479. https://doi.org/10.1080/1331677X.2018.1432371
Daude, C., & Stein, E. (2007). The quality of institutions and foreign direct investment. Economics & Politics, 19(3), 317–344. https://doi.org/10.1111/j.1468-0343.2007.00318.x
Ellahi, N., Kiani, A. K., Awais, M., Affandi, H., Saghir, R., & Qaim, S. (2021). Investigating the institutional determinants of financial development: Empirical evidence from SAARC countries. Sage Open, 11(2). https://doi.org/10.1177/21582440211006029
Financial Action Task Force. (2020). Money laundering. Paris. https://www.fatf-gafi.org/
Gardiner, J. C., Luo, Z., & Roman, L. A. (2009). Fixed effects, random effects and GEE: What are the differences? Statistics in Medicine, 28(2), 221–239. https://doi.org/10.1002/sim.3478
Gani, A. (2007). Governance and foreign direct investment links: Evidence from panel data estimations. Applied Economics Letters, 14(10), 753–756. https://doi.org/10.1080/13504850600592598
Gani, A., & Rasul, T. (2020). The institutional quality effect on credits provided by the banks. International Advances in Economic Research, 26(3), 249–258. https://doi.org/10.1007/s11294-020-09794-0
Ghulam, Y., & Szalay, B. (2023). Investigating the determinants of money laundering risk. Journal of Money Laundering Control. https://doi.org/10.1108/JMLC-01-2023-0001
Goel, S., & Sharma, R. (2017). Developing a financial inclusion index for India. Procedia Computer Science, 122, 949–956. https://doi.org/10.1016/j.procs.2017.11.459
Guidara, A. (2022). Cryptocurrency and money laundering: A literature review. Corporate Law & Governance Review, 4(2), 36–41. https://doi.org/10.22495/clgrv4i2p4
Issah, M., Antwi, S., Antwi, S. K., & Amarh, P. (2022). Anti-money laundering regulations and banking sector stability in Africa. Cogent Economics & Finance, 10(1), Article 2069207. https://doi.org/10.1080/23322039.2022.2069207
Joyce, B. P. (2001). E‐diligence: Money laundering risks in the electronic arena. Journal of Money Laundering Control, 5(2), 146–149. https://doi.org/10.1108/eb027300
Jack, W., & Suri, T. (2014). Risk sharing and transactions costs: Evidence from Kenya’s mobile money revolution. American Economic Review, 104(1), 183–223. https://doi.org/10.1257/aer.104.1.183
Kapingura, F. M., Mkosana, N., & Kusairi, S. (2022). Financial sector development and macroeconomic volatility: Case of the Southern African Development Community region. Cogent Economics & Finance, 10(1), Article 2038861. https://doi.org/10.1080/23322039.2022.2038861
Kaygın, E., Topçuoğlu, E., & Özkes, S. (2018). Investigating the Bitcoin system and its properties within the scope of business ethics. İş Ahlakı Dergisi, 11(2), 186–192.
Kennedy, P. (2008). A guide to econometrics. John Wiley & Sons. https://archive.org/details/guidetoeconometr0000kenn_6edi
Khan, M. A., Gu, L., Khan, M. A., & Bhatti, M. I. (2022). Institutional perspective of financial sector development: A multidimensional assessment. Economic Systems, 46(4), Article 101041. https://doi.org/10.1016/j.ecosys.2022.101041
Khelil, I., El Ammari, A., Bouraoui, M. A., & Khlif, H. (2023). Digitalization and money laundering: The moderating effects of ethical behaviour of firms and corruption. Journal of Money Laundering Control, 26(6), 1203–1220. https://doi.org/10.1108/JMLC-01-2023-0015
Koeswayo, P. S., Handoyo, S., & Abdul Hasyir, D. (2024). Investigating the relationship between public governance and the corruption perception index. Cogent Social Sciences, 10(1), Article 2342513. https://doi.org/10.1080/23311886.2024.2342513
Kot, M. (2021). Money laundering as a major risk to the stability of the banking industry. Prace Naukowe Uniwersytetu Ekonomicznego We Wrocławiu, 65(4), 94–110. https://doi.org/10.15611/pn.2021.4.05
Lannoo, K., & Parlour, R. (2021). Anti-money laundering in the EU: Time to get serious. Centre for European Policy Studies.
Levchenko, V., Boyko, A., Bozhenko, V., & Mynenko, S. (2019). Money laundering risk in developing and transitive economies: Analysis of cyclic component of time series. Business: Theory and Practice, 20, 492–508. https://doi.org/10.3846/btp.2019.46
Levi, M., & Soudijn, M. (2020). Understanding the laundering of organized crime money. Crime and Justice, 49, 579–631. https://doi.org/10.1086/708047
Lieonov, S. V., Kuzmenko, O. V., & Bozhenko, V. V. (2020). Forecasting the risk of money laundering through financial intermediaries. Finansovo-Kredytna Diyal’nist, 4(35), 191–201. https://doi.org/10.18371/fcaptp.v4i35.222015
Matejić, I., & Ćurčić, M. (2022). The role of electronic payments in money laundering. In Security challenges of modern society: Dilemmas and implications (pp. 219–235). University “Union-Nikola Tesla”, Belgrade.
Mavlutova, I., Spilbergs, A., Verdenhofs, A., Natrins, A., Arefjevs, I., & Volkova, T. (2022). Digital transformation as a driver of the financial sector sustainable development: An impact on financial inclusion and operational efficiency. Sustainability, 15(1), Article 207. https://doi.org/10.3390/su15010207
McDowell, J., & Novis, G. (2001). The consequences of money laundering and financial crime. Bureau of International Narcotics and Law Enforcement Affairs, U.S. Department of State. https://2009-2017.state.gov/j/inl/rls/nrcrpt/2001/rpt/8481.htm
Mejri, M., Othman, H. B., Al-Shattarat, B., & Baatour, K. (2022). Effect of cultural tightness-looseness on money laundering: A cross-country study. Journal of Money Laundering Control, 25(2), 414–426. https://doi.org/10.1108/JMLC-03-2021-0025
Mekpor, E. S., Aboagye, A., & Welbeck, J. (2018). The determinants of anti-money laundering compliance among the Financial Action Task Force (FATF) member states. Journal of Financial Regulation and Compliance, 26(3), 442–459. https://doi.org/10.1108/JFRC-11-2017-0103
Mugova, S. (2017). Financial sector development & firm growth in BRICS countries. Risk Governance and Control: Financial Markets & Institutions, 7(4). https://doi.org/10.22495/rgc7i4c1art4
Naheem, M. A. (2015). Money laundering using investment companies. Journal of Money Laundering Control, 18(4), 438–446. https://doi.org/10.1108/JMLC-10-2014-0031
Ofoeda, I. (2022). Anti-money laundering regulations and financial inclusion: Empirical evidence across the globe. Journal of Financial Regulation and Compliance, 30(5), 646–664. https://doi.org/10.1108/JFRC-12-2021-0106
Ogbeide, H., Thomson, M. E., Gonul, M. S., Pollock, A. C., Bhowmick, S., & Bello, A. U. (2023). The anti-money laundering risk assessment: A probabilistic approach. Journal of Business Research, 162, Article 113820. https://doi.org/10.1016/j.jbusres.2023.113820
Osei, M. J., & Kim, J. (2020). Foreign direct investment and economic growth: Is more financial development better? Economic Modelling, 93, 154–161. https://doi.org/10.1016/j.econmod.2020.07.009
Osuma, G. (2025). The impact of financial inclusion on poverty reduction and economic growth in Sub-Saharan Africa: A comparative study of digital financial services. Social Sciences & Humanities Open, 11, Article 101263. https://doi.org/10.1016/j.ssaho.2024.101263
Setor, T. K., Senyo, P. K., & Addo, A. (2021). Do digital payment transactions reduce corruption? Evidence from developing countries. Telematics and Informatics, 60, Article 101577. https://doi.org/10.1016/j.tele.2021.101577
Pol, R. F. (2020). Anti-money laundering: The world’s least effective policy experiment? Together, we can fix it. Policy Design and Practice, 3(1), 73–94. https://doi.org/10.1080/25741292.2020.1725366
Pratomo, W. B., Zainal, V. R., & Hakim, A. (2023). Money laundering with financial technology. Journal of Economics and Business UBS, 12(5), 3132–3141. https://doi.org/10.52644/joeb.v12i5.614
Ramos, P., Funderburk, P., & Gebelein, J. (2019). Social media and online gaming: a masquerading funding source. In Digital currency: Breakthroughs in research and practice (pp. 220–239). IGI Global. https://doi.org/10.4018/978-1-5225-6201-6.ch012
Redmond, T., & Nasir, M. A. (2020). Role of natural resource abundance, international trade and financial development in the economic development of selected countries. Resources Policy, 66, Article 101591. https://doi.org/10.1016/j.resourpol.2020.101591
Schneider, S. (2020). Money laundering in British Columbia: A review of the literature. https://ag-pssg-sharedservices-ex.objectstore.gov.bc.ca/ag-pssg-cc-exh-prod-bkt-ex/6%20-%20Money%20Laundering%20in%20BC%20-%20A%20Review%20of%20the%20Literature.pdf
Setor, T. K., Senyo, P. K., & Addo, A. (2021). Do digital payment transactions reduce corruption? Evidence from developing countries. Telematics and Informatics, 60, Article 101577. https://doi.org/10.1016/j.tele.2021.101577
Subbagari, S. (2024). Counter measures to combat money laundering in the new digital age. Digital Threats: Research and Practice, 5(2), 1–13. https://doi.org/10.1145/3626826
Sundarakani, S., & Ramasamy, M. (2013). Consequences of money laundering in banking sector. Jurnal Teknologi, 64(2). https://doi.org/10.11113/jt.v64.2243
Tang, J., & Ai, L. (2016). New technologies and money laundering vulnerabilities. In Financial crimes: Psychological, technological, and ethical issues (pp. 349–370). Springer. https://doi.org/10.1007/978-3-319-32419-7_17
Ter-Mkrtchyan, A., & Franklin, A. L. (2020). Global financial system outcomes after 2008: A longitudinal comparison. Economies, 8(1), 24. https://doi.org/10.3390/economies8010024
Thommandru, A. (2023). Smurfing in electronic banking: A legal investigation of the potential for transnational money laundering. International Journal of Legal Information, 51(1), 69–76. https://doi.org/10.1017/jli.2023.13
Unger, B., & Van Waarden, F. (2009). How to dodge drowning in data? Rule-and risk-based anti money laundering policies compared. Review of Law & Economics, 5(2), 953–985. https://doi.org/10.2202/1555-5879.1423
Vaithilingam, S., Nair, M., & Thiyagarajan, T. (2015). Managing money laundering in a digital economy. Journal of Asia-Pacific Business, 16(1), 44–65. https://doi.org/10.1080/10599231.2015.997626
Veen, H., Heuts, L., & Leertouwer, E. (2020). Dutch national risk assessment on money laundering 2019. https://www.rijksoverheid.nl/
Verdugo Yepes, C. (2011). Compliance with the AML/CFT international standard: Lessons from a cross-country analysis.
Veronicah, W. W., Jagongo, A., & Musau, S. (2022). Digital payments and financial inclusion among the youth in Kenya. The International Journal of Business & Management, 10(4). https://doi.org/10.24940/theijbm/2022/v10/i4/BM2204-023
Vincent, O., & Evans, O. (2019). Can cryptocurrency, mobile phones, and internet herald sustainable financial sector development in emerging markets? Journal of Transnational Management, 24(3), 259–279. https://doi.org/10.1080/15475778.2019.1633170
Vnukova, N., Hontar, D., & Vorotyntsev, M. (2018). Money laundering risk management tools based on determining the level of coordination of financial companies and credit unions, Development Management, 16(4), 40–51. https://doi.org/10.21511/dm.4(4).2018.04
Wang, Y. (2023). The impact of financial technology development on money laundering risks. In Proceedings of the 2023 International Conference on Finance, Trade, and Business Management (FTBM 2023). https://doi.org/10.2991/978-94-6463-298-9_20
Weibing, P. (2011). Research on money laundering crime under electronic payment background. Journal of Computers, 6(1), 147–154. https://doi.org/10.4304/jcp.6.1.147-154
Wiwoho, J., Kharisma, D. B., & Wardhono, D. T. K. (2022). Financial crime in digital payments. Journal of Central Banking Law and Institutions, 1(1), 47–70. https://doi.org/10.21098/jcli.v1i1.7
Wu, Y.-T. (2017). FinTech innovation and anti-money laundering compliance National Taiwan University Law Review, 12, 201–230. https://heinonline.org/HOL/LandingPage?handle=hein.journals/ntulr12&div=12&id=&page=
Yang, G., Liu, X., & Li, B. (2023). Anti-money laundering supervision by intelligent algorithm. Computers & Security, 132, Article 103344. https://doi.org/10.1016/j.cose.2023.103344
Yiadom, E. B., Mensah, L., & Bokpin, G. A. (2023). Environmental risk and foreign direct investment: the role of financial deepening, access, and efficiency. Sustainability Accounting, Management, and Policy Journal, 14(2), 369–395. https://doi.org/10.1108/SAMPJ-12-2021-0552
View article in other formats
CrossMark check
Published
Issue
Section
Copyright
Copyright (c) 2025 The Author(s). Published by Vilnius Gediminas Technical University.
License
This work is licensed under a Creative Commons Attribution 4.0 International License.