As has previously been pointed out the direct remedies you or the subject has are very limited. You should certainly tell the DS what has occurred. Whether you identify the recalcitrant recipient to the DS is something you will have to decide on a case by case basis bearing in mind that you are also a DC in relation to the evidence of his / her identity.
In my view the correct way to deal with this is a complaint to the ICO under s42. The recipient is making himself a DC and almost certainly does not have benefit of s36 exemption. The DS can make the complaint, or with agreement as allowed by s42 you can make it on his behalf - and that is the only way it can be done if you do not identify the recipent.
ICO must make a s42 assessment. If satisfied that there is likely to be a breach ICO can (and indeed should - but do not get your subject's hopes up!) make a decision whether to serve a s40 notice - and here note what s40(2) says - very helpful in this context. A s40 notice can compel delivery / destruction etc.
You might also assist the subject, if you identify the recipent, to draft a suitable s10 notice (since holding is processing) and advise him of his follow up rights. You might also advise him of his s13 rights - although damage seems unlikely in this scenario
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