This exact scenario happened to me. They made me do a factory reset right in front of them, before handing the phone over. I didn't have any opportunity to do anything other than what they asked, and I probably would have been killed if I tried.
I don't see how I would have been able to make use of such a feature in that scenario or any similar scenario (e.g. getting arrested at a protest). It's a nice idea, but I think its usefulness might be limited to things like airport security lines.
Fortunately, they didn't realize that Find My iPhone persists through factory resets (nice!).
Unfortunately, I couldn't figure out how to use the web interface, and ended up accidentally wiping my phone, including the Find My iPhone tracing stuff, so I never managed to trace it anywhere.