Donating an unclaimed bag is maybe an option (if the recipient is legally required to destroy all personal data). Donating a bag that your passenger has filed a claim for, and can tell you the location of, is a business decision. The penalty in this situation should be so obscenely high as to make it irrational for the airline to consider it.

Merely compensating for damages implies the bag was lost in good faith. I can't just steal your car and pay you fair market value for it without your agreement.