In fact, quite a few mods prohibit diplomats altogether. I have done quite a bit of experimentation with diplomats to figure out what they can and cannot do. Among other things, they can be used to exploit an effectively unlimited supply of money from opposing factions; even ones you are at war with. This particular exploit requires only one diplomat and one army to be used.
There are many other ways to get money using diplomats as well. The real trouble is, some of them seem "legitimate" while some are clearly broken, and a few seem somewhere in the middle. It is the ambiguity of some of these methods of getting moneys through diplomacy that makes the issue problematic: self policing is impossible in the absence of explicit parameters from the mod designers, since one cannot clearly judge what functions the mod designers accounted for in the balancing of the mod.
Clearly, each factions access to moneys was a consideration in the creation of the mod: each faction starts out with a different amount of money; each has a different capacity to generate funds; each factions armies require a different amount of funding. The mod designers felt that different financial capacities would be important to the balance of the factions, but the broken diplomacy system has the potential to more or less undermine that balance.
I have asked the mod designers to address this issue. Basically, they merely need to state what diplomatic functions have been accounted for in the present mod. They have not done so; for all I know they cannot: the mod is several years old and those who made balancing decisions may no longer be involved. I hope this issue will be addressed in the upcoming release.
Presently, my only solution is to play the mod without using any diplomatic function to gain moneys from other factions.