You may still have to ban them from certain elements of your game, like player economies (auction house, etc). But the more legitimate their experience looks the better.
The idea is that instead of fully banning them and triggering the next iteration of the arms race, you trap and release them into a competitive arena for cheaters. It's actually fun for them to compete with each other at who can cheat the hardest and no one else gets hurt. We hooked them up with a community rep. They found bugs and generally improved our security. Everyone won.
There's no way to win with an adversarial approach to cheating IMO, not when you let the client run on their machine