What would you do if your Key team member is involved in embezzlement?

Giving him a chance it's like playing with a firing arm !

Without a doubt , 

I will prepare & organize smoothly  his departure 

Take action after making sure that he is guilty and that someone else is ready to take over his work.

1 Take appropriate action

ethics are first, unfortunately he should be terminated if he is truly involved  

I will wait until projects completion or up to getting replacement for him, in the mean time giving warning and monitoring specially. 

inform to management

take appropriate action

fair inquiry without considering anything else

1. Take appropriate action without considering his performance & needs.

I would first measure the size of it in numbers against his performance, if it has a little impact on overall situation than i will give him a warning and put more controls around him.

Carryout open independent investigation & find out what truly transpered. Find out why he did it, how he did it, whose help he used, to what extent it affects the company & stakeholders. If you find out that he truly did it & knowing without being coarsed; since he is a key player, u can transfer him to another branch or place & put him in unsimilar, unfamiliar or unrelated place & duties. Incase u can't transfer him but still need his services, demote him, reduce on his salaries & roles or position & put him where he can never again do such a thing, as he works there, u can at least be cutting off some money from his salaries to compensate damages

Embezzlement is not resulted in disassociation. there is no other best way to react to it.