The Philosophers' Cocoon

In our October “how can we help you?” thread, a reader writes:

Received a referee request and accepted it after quickly reading the beginning of the paper. But after reading into the middle I realized I knew who’d written the paper – in fact I’d commented on a much earlier draft. The journal gave instructions to decline without explanation if the author’s identity was known to you. It wasn’t when I accepted! But now it is…I think I can referee impartially, but I don’t want to do anything improper. What do I do?

In general, I would think the thing to do here is to notify the journal–but this seems to me to be especially important given that this particular journal instructs potential referees to turn down review requests if they know who wrote the paper.

Any thoughts from readers?