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Breaking the rules helps no one. Advertisers lose money, and cut back on future ad budgeting because they feel it doesn't produce results. It compromises the entire AdSense program.
If the ads are targeted properly, and are relevant to the interests of your site visitors, you shouldn't have to "encourage" them to click on the ads. Google allows a lot of options to make the ads stand out, blend in, or whatever works best to make people notice them.
There are enough junk sites around running AdSense, and no doubt they are partially responsible for the lower EPCs many of us are seeing right now. Your competitor should know what the rules are, and if they choose to break the rules they should be prepared for the consequences of their actions.
The moral dilemma isn't one really. A site that blatantly asks visitors to clickon its ads is not professional and likely won't last very long. They will get their just rewards in the long term.