When I was a teenager my dad pulled the old, "I know what you did, and if you just confess then you wont get in as much trouble" routine. Of course he had no clue what I had actually done but on more than one occasion I spilled my guts like a dummy. Maybe you could have Santa call him (grandpa, daddy, uncle) and tell him that he knows that he touched his elf and he sees everything he does, etc. You might be able to get him to confess and then Santa can forgive him but tell him never to do it again.
What a sticky situation, good luck