Brando, you gave me a good idea, I think.
Make being red based on reputation, but only allow word to spread if someone witnesses you acting as a red - and lives... Require witnessing to take some sort of action, and require them to be within a certain range.
Unskilled red characters would pile up penalties.
Clever reds who leave few if any witnesses would only very slowly build penalties.
Do not allow people who are killed to be able to report you - they just do not remember well enough to convince anyone, though they can certainly know as a player...
How to penalize for being red?
Force logout and do not allow to log back in. The redder you are, the longer you have to wait before playing again.
Players would report to either NPC's, or perhaps to Mayors or even a bulletin board type item. (Xyson's Most Wanted, heh)