It might not be an issue for your company, but your candidate might have a non-compete (or other clause) preventing them from accepting compensation or even performing work for another company at all.
Things get trickier as soon as money is involved.
This payment looks like easy money for cheaters who would copy ready made solutions or ask friends for help. I'm not convinced, but this is indeed how things should be done in an ideal world.
I guess we could also ask candidates to pay. That is what is done in engineer schools in France. Not sure this is a good filtering method because of the Donner Kruger effect.
Well, it's a good thing we have (now domestic only) banking secrecy in Switzerland, for exactly these reasons. You only get into trouble when your livelihood doesn't make sense from what you earn and own - as long as you pay what's generally considered a 'fair' amount of tax, no-one will blink an eye and come after your documentation. And even if for some reason the government finds out, all that will happen is a penalty tax ranging from 20 to 300% of the missed revenue, usually 100%. There is an explicit difference between tax fraud (document forgery, which could mean jail) and tax evasion (when you 'forgot' to declare something, which leads to above penalty.
Overall, the system is set up so that the government can't abuse its asymmetric power over individuals, instead keeping it as close as possible to an 'employee' of the people.
But you are the one that placed yourself in a bad situation. They have a sane procedure that fully respects you, but isn't fine-tuned to your current problems. You can try negotiating their procedure too, but in their place (what I'm not, I'm in the "can't bill you" place right now), I'd refuse to.
This goes against the core message of the article. The candidate is supposed to think about a problem on their own, and propose a well-reflected solution on Monday. That's pretty much the opposite of "sit down in this noisy corner in an unknown environment and give us something in two hours".
> The other problem is that when you pay them you generate all sorts of nightmaris legal liabilities.
If hiring a freelancer to do a little thing tends to generate all sorts of nightmarish legal liabilities, your company is either a government contractor or it has even bigger structural problems than hiring.