Seems slightly clumsy imo, all too automated and black and white.
My suggestion would be not too different from 'spotting' an enemy in Battlefield 2 and related games. For those unfamiliar with this, in that game's context pressing the "report" button calls a menu with selectable options such infantry, armour etc for the player to mark for the benefit of their allies and themselves. With an aiming feature, this tag can locked onto a character.
Running off your idea of the game doing the detecting of the action, the game would shortlist the applicable options. I also think that this would also go better with individual and faction reputations as well as an oppurtunity to contribute to a global rep. In your thief example hence the player might have the options of
-"dirty thief" (denouncing to either faction and world)
-"enemy of my enemy" (marking player as a partial ally if they're stealing from a marked foe) or
- a lesser thief marker, marking the stealing character as untrustworthy/unfriendly to the player and their faction but otherwise ignoring the crime.
Contributions to global reputations would be weighted, so a player tagged as stealing can't be untagged easily by his six 'guild' buddies, especially if they too have counts towards thief repuations.
And equally I'd have to disagree with your statement. The technology and systems exists, even if a full implementation has not. A good example some of the more die-hard gamesas guys might not like so much is actually Fallout 3's and its technological predecessor Oblivion's engine(s). NPCs are treated very similarly to
the player character in many regards, and in an object oriented programming structure this would actually be an easier and more natural approach. Obviously an MMO would have to dynamic and handle a multitude of factors and changes, but I think it is entirely technologically possible. Obviously a bit more information regarding the Earthrise engine might be helpful here.
The effort of creating and constantly running all these scripts in considerable, but not so a pure technological problem but rather a problem of manpower and costs of computer capability (which is related to technology, given, but distinct.) Why do games studios have to fight and die? War, war never changes : (