The first thing your friend needs to do is eliminate ANY possibility that Gramps registered the Sten during the amnesty in 1968. If he did, there's a good possibility that the gun can eventually be sold as a transferable. I would guess an original WW II Sten is running around $8K these days, so it's worth checking.
The best person I can think of to advise your friend is Bob Naess, of Black River Militaria in Vermont. He has been playing with MGs since the 50s and has helped quite a few people untangle messed-up ownership problems. It can be done.
If it turns out to be non-transferable, it can be cut up and sold as a parts set or donated to a legitimate museum for a tax write-off. I am not familiar with NY state laws in this area and they might complicate things. Good luck!