Remove them. I’ve found it’s easy to rip the bandaid off sooner rather than later. The largest site I’ve ever owned almost shut down about 10k members in because I hired a Celebrity (For the genre) as a moderator. She was super cool, friendly, helpful, etc. but the moment she became a moderator she had bias for her friends, and followers. So she would let them slide with a lot of things, etc. I let it slide because, well, she was a celeb and brought a few thousand people there herself. Wellllllll at about 15k members she did something drastic (I forgot) and I ended up stripping her of moderator, but by then she had a web in the community and it ended up splitting the community and killed the site drastically for a few months. We ended up bouncing back, but it was never really the same, or as active.
So, from my personal experience I’d say strip them of Moderator, send a polite DM explaining why, and move on from there. Or if you’d like to do the 3 strike rule you can do that but personally, I’d just strip them. It’s better to lose a mod and potential active member now than a mod/potential active member, and anyone who’s grown attached to them during their staff position.