Alms Tax: Zakat Given to a Debtor Who Spent the Loan for a Sinful Purpose
Practical Laws of Islam as per the teachings of Ayatullah Sistani
Ruling 1953
If a person gives zakat to someone who is in debt but is unable to repay his debt and he later realises that the debtor spent the loan for a sinful purpose, in the event that the debtor is poor, the person can count what he gave him as the portion of zakat that is given to poor people.
-Ayatullah Sistani, Practical Laws of Islam, Alms Tax (Zakat)