Firstly, do you know for certain the materials are illegal? Some recordings are made available without cost by the copyright holders (usually with conditions). I know one radio station that puts MP3s of popular songs for download for a limited time with permission of the publishers.
Assuming the materials actually are illegal, you probably are already doing what you should. For the most part people who download illegal materials already know what they are doing. Your telling them your preference for purchasing the use of recordings demonstrates to them your understanding of the issue so there is no further need to lecture them on the inappropriateness of making unauthorized copies. By stating your preference, you have not ignored the issue. The only thing that remains is the question of reporting. That presupposes you know who to report it to. I don’t know myself so I wouldn’t be able to make a report. I suppose I could research that information but then I’d have to examine my motives, as well. Am I seeking for them to suffer the indignity of dealing with the legal repercussions? Am I seeking a kind of vengeance for paying for what they’re acquiring for “free.”