'Is he secretly laundering money?' I loaned a friend $30,000. He wants to pay me back using an offshore account.

By Quentin Fottrell

'Am I asking for trouble?'

Dear Quentin,

I loaned a friend $30,000 and he wants to pay me back from an offshore account. Is this a problem? Does it matter if it's a personal account? I also have an LLC, but if he pays it into my business account it will be taxable, I believe. Am I asking for trouble? Is he secretly laundering money?

Trying to be a Good Friend

Related: 'Once a cheater, always a cheater': I'm the beneficiary on my ex-husband's $250,000 life insurance. He's now threatening to change it. Is he in breach of our divorce decree?

Dear Good Friend,

Be a "good citizen" before being a "good friend."

You were perhaps asking for trouble, or at least asking trouble to RSVP, by loaning $30,000 to your friend, especially if you did so without a promissory note. Only ever loan money if you can afford to lose it, and always make sure you get it in writing. Rules for promissory notes vary by state, but typically have a term by which the money should be repaid.

A promissory note, as its name suggests, is a legally binding promise to repay a debt. Most promissory notes have terms that ensure they are valid. They must be deemed fair to both parties, and be signed by both parties, and state the exact amount of money borrowed, in addition to the interest rate, the frequency of payments and the term of the loan.

The Internal Revenue Service does not consider repayment of loans as taxable income. However, if you charged interest on the loan or you wrote the loan off as a bad debt, you would include that in your income-tax return. (The rules are the same for business accounts; ideally, however, you should keep your business and personal transactions separate.)

What's more, if your lender forgives or cancels more than $600 of your loan, the loan amount you received could be subject to income tax, according to Quicken Loans. "Usually, cancellation of debt happens if a borrower is in financial trouble and negotiates for debt relief. If you have canceled debt during the tax year, you'll receive IRS Form 1099-C."

Look after your own house first

It's also essential to ensure the loan agreement passes muster with the IRS. "When someone lends you money and doesn't charge you interest, or charges a below-market rate compared to the IRS's current applicable federal rate, the IRS might consider the loan a gift or require them to pay income taxes on imputed interest," Experian says.

Depositing a large amount of cash that is more than $10,000 into your bank account will lead to a report by your bank to the federal government under the Bank Secrecy Act, which was passed by Congress in 1970 and amended under the Patriot Act in 2002. This is to help prevent people from money laundering. In other words, look after your own house first.

Is your friend laundering money and using you to do this? Here's the good and bad news: I don't know and neither do you. What I do know is that money laundering can result in hefty financial penalties and even jail time. You should get this loan in writing, if you have not done so already, and keep a detailed account of your financial transactions.

Some questions to ask: Does your friend have a U.S. bank account? Why does he need to transfer money from an offshore account directly into your bank account? Why did he need the $30,000 in the first place? What are the sources of this offshore bank account? Always listen to your inner Jiminy Cricket. Don't be a money mule.

Ask questions before proceeding

Turning the other cheek is not an option. The Consumer Financial Protection Bureau defines the latter thus: "A money mule is someone who receives and moves money that came from victims of fraud. Some money mules know they are assisting with criminal activity, but others are unaware that their actions are helping fraudsters."

Money mules can be targeted by friends, acquaintances or love interests. "If someone you don't know sends you money and asks you to forward or transfer the money, you could be fueling fraud by serving as a money mule," the CFPB adds. "Money mules may be recruited through an online job ad or social-media post that promises easy money for little effort."

Here are some of the other red flags, per the agency: "Don't agree to receive or send money or packages for people you don't know or haven't met in person. Don't take a job that promises easy money - especially if it involves sending or receiving money or packages. Don't open a bank account or cryptocurrency account at someone else's direction."

"Pig butchering" is a common method for scammers. The scam artists scour social-media sites, public records and dating sites for marks. It's called "pig butchering" because they take their time fattening up their marks, establishing trust and feeding the victim information promising bigger and better returns. Next time, your "friend" could raise the stakes.

Due your due diligence and hope it's all one big misunderstanding.

Previous columns by Quentin Fottrell:

My husband wants a divorce after 20 years. He offered his $275,000 401(k) in exchange for our $250,000 house.

My mother excluded her late husband's family from her will - and left everything to me. Should I help them out?

My husband spent $85,000 on repairs to my house before we married. Does the house remain separate property? What happens if I die?

Check outThe Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

By emailing your questions to The Moneyist or posting your dilemmas on The Moneyist Facebook group, you agree to have them published anonymously on MarketWatch.

By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

-Quentin Fottrell

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-11-24 2137ET

Copyright (c) 2024 Dow Jones & Company, Inc.