How do you reduce Infamy after destroying Merchant ships?

Go to the trade menu which you can get by tapping on the red Skull at the top of the screen and selecting the Trade option, and go to the Dock Merchant.

Scroll down to find the Heart of atonement items that you can buy with emeralds.

you can then find the Atonement items in your inventory and tap on 'Use' to reduce the infamy by the appropriate amount.