The question doesn't say whether it's clear that the manager knows that this is a bad idea and that it violates policy. If I were the manager, I would want you to start by giving me this information.
Step 1. Send your boss an email saying something like this: "Dear Boss, I don't think we can do it this way. You might not be familiar with Company Policy 42, which we'd be violating. Instead, maybe we could..."
Even if he does already know this, but all previous communications have been oral, do this anyway. It establishes a record where you are acting reasonable and responsible, and it it also gives him an out, if he wants it.
Step 2. Reading between the lines, it seems like you have serious concerns about this manager's ethics and competence (e.g., you express serious concerns about retribution). Think about quitting, or if that's not feasible, maybe you could get a transfer.
If a resignation or transfer aren't options, or will come too late, don't just try to get a CYA email from your boss and then proceed. You've expressed clearly that that would be unethical, and in any case it doesn't necessarily protect you, because, as you say, your boss doesn't have the authority to override the policy.
Step 3. Send your boss an email like this: "Dear Boss, It sounds like you think that Policy 42 is a bad policy, or that an exception needs to be made in this situation. That kind of policy decision is way above my pay grade. Could you consult with higher-ups about this?" Simultaneously open a conversation with HR and supply them with copies of the two emails.