I think more options to launder money would be cool like for example an illegal area at the casino (I've seen this on another server) where players could use mechanics to launder it like how you turn weed buds in to joints or something similar. Some things to balance it could be alerts to police after a random amount of cash has been laundered, a set amount you can launder before police are alerted, or a cool down period after a player has laundered cash that would alert PD if anyone else attempted to launder before the cool down was over. You could also make it so that laundering money this way yields significantly less than using a business so that way there are more opportunities for RP if players want a better yield. I'm sure there are other ways to make this work as well, I'm just throwing out some ideas.
It seems like the system now is too high risk for the reward but I'm also not entirely familiar with the whole process. It would just be nice to have more ways to do it. Maybe instead of having it automatically alert police that someone is laundering with a business make it so that it only alerts them after a certain amount has been laundered in the ways I described above. I think it would be fun to have the amount that would alert police unknown or just be RNG so that you never knew if they were coming to investigate or not. This would allow businesses that stick to laundering smaller amounts at a time to go unnoticed but would still leave room to be caught in the act especially if they were getting greedy with how much they were trying to launder.
As far as determining whether money is dirty or not you could have police ignore dirty cash unless the suspect has either robbed a store, sold drugs, were in the possession of drugs/illegal guns, or in the act of laundering money in which case it would be confiscated when they were charged with such a crime. Otherwise PD could question about why they have so much cash on them but if there was no probable cause to believe it was dirty cash then the player could keep it to avoid unrealistic RP described by the OP.
Apologies if any of this has already been mentioned or if I'm not exactly familiar with the current system. I'm just basing these ideas off of how it's been described to me. I'd love to know what other people think.