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If it's really desirable for grandfather to have contact with the filching person, make sure they're never alone.
Also address the issue of whether GF has a durable power of attorney, and if so, who has control so that measures can be taken to protect GF's funds, even if they have to be put in a separate account of which GF is unaware.
If the person didn't have mental and substance abuse problems, you could confront that person with a demand for repayment. If you have knowledge of drug connections and other illegal activity, you could also alert the police anonymously. It sounds as if this person really shouldn't be involved in family dynamics, and his/her drug activity may provide a method of removal.
No one should be confronting your grandfather, he can't retain information based on his memory loss. This problem has to be solved without your grandfather's input and someone needs to look out for him. He can't be expected to do the rational, logical thing if he has dementia.
The family member who is at the center of all of this needs to be dealt with. As your grandfather's caregiver can you limit their time together? Or how about not letting this person see your grandfather at all? Your grandfather is being financially exploited and that's against the law. Have you contacted the police?
Someone needs to step up and protect your grandfather.