Answered by Shaykh Faraz Rabbani
How to get rid of haram money?
In the Name of Allah, Most Compassionate, Most Merciful,
There are a few important points here:
1. Giving and taking interest are both decisively impermissible in Islam. Similarly, it is impermissible to consume unlawfully-earned money.
2. Given this, the default is that it is impermissible to have any kinds of interest-bearing accounts. Many banks provide zero interest current accounts. If these are available where you are, it would not be permissible to get an interest-bearing account, even “low interest.” Given the need to safeguard money and the unavoidable need to engage in financial transactions, the jurists of our age have given a dispensation for low interest current accounts if the abovementioned type are not available.
3. When you deposit money in the bank, the interest they give you is not your property, Islamically. Similarly, unlawfully-earned money is not your rightful possession. The default would have been to actually return it to its rightful owners. When this is not possible to do, we are legally obliged to effectively return it to them by giving it away in charity, so that even though their money does not go back to them its benefit does in the form of the benefit of charity given on their behalf.
It is only charity, however, with regards to the actual owners of the money. When you give this money away, you can only intend to get rid of unlawful filthy money from your holding, while repenting and seeking Allah’s forgiveness for disobeying Him in a matter He deems most hateful. To seek ‘good’ or reward when one gets rid of this money would be a serious sin in itself, the fuqaha tell us.
One may either give this money to those deserving of zakat (=the poor and needy), or to charities. There is nothing wrong or dubious with accepting this money, because the sin devolves back to the person who wrongful engaged in the unlawful transaction and not the actual money itself.
[Sources: al-Hadhr wa’l Ibaha of al-Nahlawi, al-Fatawa al-Hindiyya, Ibn Abidin’s Radd al-Muhtar, with some details from questions asked of contemporary scholars]
And Allah alone gives success.