Sisko's Line in Waltz

"And that is why you're not an evil man" is the line delivered by "Judge" Sisko in the caves with Dukat

For context: https://www.youtube.com/watch?v=HozGJeunqRk

and transcript: http://www.chakoteya.net/DS9/535.htm

In the context of this dialogue, Dukat is asking "Judge" Sisko whether or not the statement "I'm such a monster, such an evil man" is factually true.

Now, I've always interpreted this line to say that: Sisko's ruling is that, because Dukat did not kill all the Bajorans, he is not an evil man and the statement is factually false when applied to Dukat when he was prefect of Bajor. But we know at the end of the episode, Sisko does think Dukat now is an evil man.

Or can his line be interpreted as saying that Sisko thinks Dukat is mentally insane, rather than evil?

Or was Sisko saying this line sarcastically or ironically?

Or is there another interpretation for the line?