Is it permissible for my friend to take money as a trust, knowing that it was acquired through unlawful means, and then spend from it when needed, intending to return it later?

If your friend knows that the money deposited with him is unlawful (haram), he must consider the reason for its unlawfulness:

1. If the money is unlawful in itself (e.g., usurped or stolen): He is obligated to return it to its original owner if he knows him, to discharge the right of others. If he is unable to do so, he should return the deposit to the depositor (the usurper) while advising him of the unlawfulness of encroaching upon people's property. If the depositor does not comply, he should inform someone who can take action against him.

2. If the money is unlawful due to its earning (e.g., usurious interest): If he knows that it is the exact unlawful money, he is obligated to dispose of it by spending it on the welfare of Muslims or giving it to the poor and needy, as long as no harm results from it. Otherwise, he should return it to the depositor while admonishing him and explaining the ruling to him.

3. If he does not know that the deposited money is the exact unlawful money: There is no blame upon him for keeping it and returning it to its owner.

Note: It is not permissible to take money from the depositor by way of a loan without his permission, as this is a betrayal of trust.