Whether what they were doing was "legal grey area" or "flatout illegal" is for the courts to decide, not for a random hiring manager/engineer interviewing that person. If you have a feeling that something could've been "flatout illegal", consider reporting them to the appropriate legal channels.
I, personally, would have done the latter in that scenario, but only if that entry was on their resume and they were proud of it. So no, I wouldn't report someone who personally confessed that many years ago they were dealing or doing sex work of the illegal kind. Though I heavily doubt that someone would be dumb enough to put it on their resume and advertise.
