Also called flagging, check kiting is a form of check fraud. It uses float (the time it takes for a check to clear) to make use of non-existent money in a checking account. In essence, kiting turns bad checks into a form of unauthorized credit, and that’s bad news for banks.
Kiting cycles can continue almost endlessly or until the account holder gets a real check to disrupt the process. For instance, some people use check kiting as an illegal form of interest-free credit to keep their account positive until they receive their paycheck.
Types of Check Kiting
There are several types of check kiting:
- Circular Kiting —- This form of kiting uses multiple accounts at different banks. The accounts can both be in the same account holder’s name, different names, or even involve a group of people. The account holder writes and deposits checks (often of increasing value) from one account to another to create the appearance of a balance.
- The ‘Endless Kite’ — This involves checks printed with the name, logo, and address of Bank A but with a routing number from Bank B. Bank A doesn’t recognize the routing number, so it sends the check to Bank B. But Bank B doesn’t recognize the other details, so it returns the check to Bank A. This cycle can repeat endlessly, even after the amount from the check has been credited to the depositor’s account.
- Retail-Based Kiting — This kiting scheme involves a party other than a bank to unknowingly offer temporary funds to an account holder. For instance, if someone writes a check over the purchase amount at the grocery store to get cash back, that is check kiting if they don’t have the funds in their account. The check writer may cover the funds with a paycheck or another valid deposit in a day or two to prevent the check from bouncing, or they may take the cash, deposit it in their account, write another check to the store to get cash to cover the first check, and then continue the cycle for several days or weeks until they have actual funds to deposit.
- Corporate Kiting — The use of a large kiting scheme potentially involving millions of dollars to secretly borrow money or earn interest. This primarily applies to corporations who don’t have limits on how much of their deposits are credited immediately. Then, unscrupulous managers or owners take advantage of that system by depositing bad checks and spending the funds.
Felony or Misdemeanor
Depending on state laws, small or minor instances of check kiting can result in misdemeanor charges. But, when kiting involves large amounts or multiple checks, felony criminal charges may come into play. An offender can expect to face both state and federal charges for check kiting, as this fraud is regulated by the federal government.
Kiting is a serious crime and is one of the most enforced types of white collar crimes. First-time offenders can face very stiff penalties, including fines of $500,000 or more as well as more than 20 years in prison. Additionally, the offender may face civil charges from the bank, or banks may take legal action to cover their losses. Penalties can be even greater when large businesses or corporations are found guilty of the fraud.
Who Gets Hurt by Check Kiting?
Although kiting isn’t the most popular type of deposit fraud, it can be far more devastating to financial institutions than other types of bank fraud. As Sydney Hicks of Sterling Commerce banking systems division explains: “Other fraud is like a thunderstorm; kiting is a tornado.” In some cases, check kiting can actually cause a financial institution to close its doors.
If you want to protect your financial institution from the potential devastation of a check kiting tornado, you need the right fraud protection. To learn more, contact us. At SQN Banking Systems, we make fraud protection simple.