Grapeseed by the O'Neil's farm (or its burned remains)
$250 for helping the criminal
For these arrest encounters there is only so much you can do. First, there is taking down either the criminal or the police officer. Killing the police officer will get you a 3 Star Wanted Level but earn you the gratitude of the criminal who will award you $250 before running off.
Taking down the criminal will get you the "gratitude" of the officer. He'll tell you to leave the area. If you kill the criminal, then you get a 2 Star Wanted Level.
Either run the criminal down to stun them or just leave things be are the best choices you'll have here. However, you must intervene in one way or the other for it to count as complete.