Licensed Detection Agents: A New Market Mechanism for Financial Crime Detection

In November 2025, the Central Bank of Ireland imposed a €21 million fine on Coinbase Europe for failing to fulfil its Anti-Money Laundering (AML) obligations. Coinbase accepted that it neglected to monitor over 30 million transactions over a 12-month period, accounting for €176 billion in value. But Coinbase is not alone. The world’s financial institutions incur fines and face criminal prosecution at an alarming rate for inadequately monitoring their clients for signs of suspicious transactional activity. And best estimates suggest we detect less than one percent of global money laundering. In the words of scholar Ronald Pol, AML may be ‘the world’s least effective policy experiment’.

We desperately need new ideas. In an article now forthcoming at the Berkeley Business Law Journal, I propose a market-based solution: Licensed Detection Agents (LDAs). Inspired by the success of whistleblower incentivization systems, the LDA program would create a new class of private companies empowered to monitor transactions and rewarded for reporting suspicious activity to regulators. The LDA program would professionalize whistleblowing by creating a regulated market for financial crime detection. In so doing, it would improve enforcement outcomes while also providing a method of detection that protects customer data from unconditional state access.

The LDA program is designed to solve what I refer to as the Detection Trilemma. This refers to the policy predicament presented by existing forms of detection. If we take a step back and think about the ideal policy attributes of a detection system, we would generally want to achieve all of the following:

• Data access: we would want our detection agents to have sufficient access to the data needed to identify suspicious transactional patterns.
• Positive incentives: we would want our detection agents to possess properly aligned incentives to detect and report financial crime.
• Privacy protection: we would want to protect our personal financial data from direct unconditional access by state authorities. 

Yet no existing approach to detection can deliver all three at one time. The most common method of detection, gatekeeper surveillance, relies on private companies like Coinbase to monitor customer transactions and report suspicious activity through Suspicious Activity Reports (SARs) or similar mechanisms. But there is an inherent conflict of interest within the gatekeeper model, one in which we naively expect that private companies will happily monitor their own clients. We have substantial evidence of companies succumbing to this conflict by underinvesting in compliance controls, looking the other way, or even assisting criminal schemes to maintain client relationships. 

The problem is not, however, merely about incentives. If that were the case, we could simply allow the state to directly monitor our financial transactions. State surveillance is, however, a step too far for many. It arouses deep anxieties about government overreach, and privacy risks are often cited in opposition to such proposals. Nor can we rely on ad-hoc investigations like those performed by corporate monitors. While monitors possess positive incentives to detect financial crime, they generally only obtain samples of data and thus cannot perform comprehensive monitoring. 

LDAs thread the needle between these competing policy concerns. The process would start with licensing. Private firms like forensic consultancies and software providers would apply for permission to operate as an LDA. In the UK context, for example, performing LDA tasks would constitute a new form of regulated activity. Licenses to perform that activity would be dependent on firms satisfying various requirements, including demonstrating that they have procedures in place to protect client data. 

Once LDAs are licensed, they would be provided with access to the data. Regulators would provide that data where possible. The US Securities and Exchange Commission (SEC), for example, possesses direct access to the Consolidated Audit Trail (CAT), a national database of equities and options trading. The SEC could provide LDAs with access to CAT, thereby allowing them to search for market abuse. Where regulators do not possess that data, they would obligate gatekeepers like banks and exchanges to make their customer data available to LDAs for the purpose of surveillance. This would likely require certain assurances that LDAs focus their surveillance efforts strictly on gatekeepers’ underlying clients rather than the gatekeepers themselves. 

Where LDAs identify suspicious activity, they would perform an investigation and submit in-depth reports to regulators in return for rewards. Those rewards would specifically come in two forms. First, LDAs would be provided with a percentage share of any civil penalty or recoveries obtained (perhaps an uncapped total of 30%). But they would also be provided with short-term payments for each report. The reason for these latter payments is to ensure acting as an LDA is a viable business proposition given the lengthy amount of time needed to obtain and distribute larger payouts. There would be strict conditions on these payouts to mitigate the risk of overreporting. 

The LDA program would, in sum, flip the perverse incentives of the gatekeeper model while generating revenue for the state. And it would also provide relatively strong protection of customer privacy. Specifically, it would create a barrier between citizens and the state, one where LDAs only share the former’s data with the latter where specific conditions are satisfied. This is not a perfect system. But it offers advantages over situations where states are provided with direct unconditional access to private citizens’ transactions.

The program is not, of course, a cure-all for financial crime. There are various risks which I discuss in the article. And there are country-specific legal and political considerations that one would need to contend with. But these efforts are worthwhile. Financial institutions spend more than $200 billion on financial crime compliance, costs that are in many cases passed on to consumers in the form of higher fees. And regulators are also spending great sums policing gatekeepers, a task made necessary by the latter’s misaligned incentives. Nevertheless, detection rates remain woeful. The LDA program is an approach to solving this problem, one that utilizes the power of self-interest to achieve a socially beneficial outcome. 

The author’s article is accessible here.

Miles Kellerman is an Assistant Professor at the Institute of Security and Global Affairs (ISGA) and a member of the Diplomacy and Global Affairs research group.