I don't think you understand how Adwords and other PPC services work.
First, rules say that the URL shown in the ad must be the one reached when the ad is clicked. So if they put your URL in the ad, the landing page must be to that URL. If they redirect to their own site, that is against the rules and those ads will not show. Go ahead and click the ad and see where it lands.
In my opinion, they are doing you a bit of a favor. Obviously, if the clicks lands on your site, as it should, you are getting free advertising. Even if nobody clicks, they are branding your site, not theirs.
On the other hand, I don't know what the ad says and it may not be flattering or put you in a bad light, you don't say that. It is also making it harder for you to advertise on Adwords yourself. Only one ad per domain will show for any one search. This can be circumvented by having better ads since the better quality ad will show more often.
As for click-bombing ads, that is unethical and a waste of time, time better spent working on your own business. It's a waste because Google has systems in place to mitigate such activity. It just wouldn't work if your objective is to use up the competitor's budget. You don't even know their budget or their CPC (although you can have a fairly good idea on the latter) so how many clicks would it take? Would it make him stop?
If somehow you can get around Google's systems, you would actually make it worse for yourself. The system is based on awarding better quality which is based on how many people click ads. So by giving the competitor clicks, you are improving their quality. This means their ads move up in the rankings for the same bid and may reduce their CPC meaning they get more clicks for the same budget. If you improve their quality, you make it harder to have better quality yourself and thus to have your ads above theirs.
You best approach is to contact Google and tell them the situation.
