Incentive design matters more than mandates: a properly structured reward system for accurate risk reporting can outperform forced information sharing, which can actually harm welfare when banks face competitive pressure.
Banks struggle to detect money laundering because each holds partial information about risky customers, but sharing that information creates perverse incentives. This paper designs a mechanism that rewards banks for truthfully reporting suspicious activity using a scoring rule tied to verified outcomes, proving it works better than mandatory information sharing or no coordination.