Licensed Detection Agents: The Case for Financial Crime Bounty Hunters

Abstract

Policymakers around the world have outsourced the detection of money laundering, market manipulation, and other financial crimes to the private sector. This approach, commonly referred to as the gatekeeper model, obligates companies to monitor their own clients and report suspicious activity. Unfortunately, however, evidence suggests this model is not working, due in large part to the inherent conflict of interest in private monitoring. Regulators have employed alternative institutional arrangements to overcome this conflict, including mandating corporate monitorships and engaging in state-led surveillance. But these arrangements involve difficult tradeoffs between data access, positive incentives, and privacy protection.

This article conceptualizes these tradeoffs as the Detection Trilemma and puts forward a novel policy solution. It advocates for a new program in which Licensed Detection Agents (LDAs) are empowered to surveil financial transactions and financially rewarded for reporting suspicious activity to regulators. The program would create a competitive market for detection, one that solves the Trilemma while providing regulators with a new source of information on criminal schemes. Further, it would pay for itself, generating revenue for the state that would exceed its implementation costs. After outlining the dynamics of the Detection Trilemma, this article reviews existing evidence on incentivization programs before proceeding to explain the operational details of the LDA program. It then examines how the program could be applied to the detection of financial crime in three specific settings: market manipulation in the US, market manipulation in the UK, and money laundering in the US. By performing these tasks, this article advances debate on financial crime and, more broadly, how policymakers can utilize the power of self-interest to achieve socially beneficial outcomes.

Keywords: financial crime, surveillance, money laundering, market manipulation, insider trading, fraud, regulation, financial regulation, gatekeepers, privacy, public-private, sanctions, terrorist financing, trilemma, detection, whistleblowers, bounty hunters

JEL Classification: K2, N4, G18, G28