You cannot arrest someone important such as the big "crab" guys or a baker. The only people that can be arrested are most of the regular people. In order to arrest a person, you must have a pistol (and not a machine gun). The person must be weaponless. Get behind them and press X. That should make the cop say "Freeze". Immediately press X again to avoid getting kicked. If done correctly the person should be crawling on their knees with their hands behind their backs.