If you want to be an upstanding member of the community, report him.
If you want to be a good friend, talk to him and see if you can still be friends. If you're not comfortable with how things are, you're not going to be happy, and that wouldn't be a healthy relationship.

You can do both, if you want.

And even if your friend is caught and banned for buying gil, you'll probably still be able to play together.
If we go by SE's near-weekly reports, they only suspend accounts for that offense.