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, the model is not working. Gatekeepers incur fines at an alarmingly consistent rate for performing ineffective surveillance, and evidence suggests that the vast majority of financial crime goes undetected. There is a general consensus that these failures reflect the inherent conflict of interest of the gatekeeper model. But observers also agree that transferring these surveillance responsibilities to regulators would raise serious privacy concerns. This paper proposes a third way. It advocates for a new program in which Licensed Detection Agents (LDAs) are empowered to monitor financial transactions and rewarded for reporting suspicious activity to regulators. The LDA program would create a competitive market for detection, flipping the perverse incentives of the gatekeeper model while preserving customer privacy. In so doing, the program would solve what I refer to as the Detection Trilemma. The paper introduces this trilemma, reviews existing incentivization programs, and outlines how empowering LDAs would improve regulators’ capacity to generate actionable information on suspicious activity.

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