Bank fraud leads to billions of dollars in losses every year, and to stay profitable, banks must be extremely proactive at detecting and preventing fraud. Being successful requires robust knowledge of popular bank frauds including check kiting. To help you out, this post looks at the definition of check kiting followed by types of kitting, and red flags. Then, it briefly examines different types of kiting schemes.
What Is Check Kiting in Banking?
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.
Some people use check kiting as an illegal form of interest-free credit to keep their accounts positive until they receive their paycheck, while criminals use check kiting to create fraudulent balances that they then withdraw before the bank realizes the check is bad.
Types of Check Kiting
There are several types of check kiting including the following:
- 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 that 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.
What Is the Penalty for Check Kiting?
Check kiting may lead to bank fees, account closure, and criminal charges. 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 several 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 this type of fraud.
Check Kiting Audit
Auditing can help you spot check-kiting schemes in business accounting records. Kiting may be happening if a check was recorded at the bank before it was recorded as a disbursement from the accounting records. Note, however, that this type of audit only helps a business detect kited checks. Banks must have their own internal processes for spotting kiting on their end, and in particular, they should be aware of the red flags.
Red Flags of Check Kiting
To spot check kiting schemes at your financial institution, you should be aware of the following red flags:
- Frequent deposits, especially with increasing amounts for each deposit.
- Accounts with low average balances but high numbers of cashed checks
- Unusually excessive balance inquiries – kiters monitor their balances closely to watch for kited checks to clear.
- High numbers of checks written from the same account holder between accounts at different banks.
- Significant volumes of insufficient funds transactions.
- Checks deposited early in the morning or late at night – Kiters do this to extend the float time and decrease the chances of their checks being returned.
- Banking outside of the local area.
To reduce the risk of suffering losses from check kiting, you may want to put holds on checks over a certain value, but unfortunately, as you’re required to credit deposits in a certain way, this tactic cannot work on its own. You also need to monitor new accounts, verify the identity of people cashing checks, and have check fraud detection tools that look for unusual patterns on accounts.
Examples of Check Kiting Cases
As indicated above, check kiting is often used by legitimate account holders who are just trying to buy time until payday. These customers often don’t even realize they are committing check fraud, and to minimize this risk, many banks offer direct deposit advance credits or similar products to help account holders who live paycheck to paycheck. However, many other cases of check kiting are much more nefarious including the following:
- $150 million stolen in a Michigan check kiting case – Starting in 2014, Najeeb Khan used check kiting and wire transfers to inflate balances in multiple personal and business accounts. He was sentenced to 97 months in prison followed by three years of supervised release and ordered to pay over $150 in restitution to his victims and the IRS.
- Over $6 million stolen by an automobile dealer – This criminal took advantage of the fact that the bank credited all of his deposits without any hold time, and to generate false balances he started writing fraudulent checks from his accounts to his other accounts. By the time the banks noticed this check kiting scheme, the account holder had overdrawn one business account by over $6 million and another by over $200,000. He was sentenced to several years in federal prison.
- Check kiting with insider help – Douglas Mayfield wrote bad checks to John Linthicum at his request. The checks were for $100,000 plus with a total value of $1.2 million, and although the branch manager Angela Asbell knew the checks were bad, she credited them immediately and authorized Linthicum to wire the funds out of his account.
For their roles in this check-kiting scam, Linthicum was sentenced to 27 months in prison with five years of supervised release, Mayfiled was sentenced to six months of home detention and three years of supervised release, and Asbell was sentenced to five months in prison, five months of home detention, and three years of supervised release.
Credit Card Kiting
Credit card kiting is when people pay credit cards with money that they don’t really have in order to obtain cash or artificially inflate the purchasing power of the credit card. Although this is very similar to check kiting, it is governed by a very different set of laws. Generally, if banks want to prosecute this type of crime, they need to prove intent to deceive as many types of credit card kiting fall into a legal gray area.
For example, someone may take a cash advance from a credit card. Then, they may use the cash to pay off last month’s balance so that they can avoid interest charges on the old balance.
Alternatively, someone may use a payment service like PayPal or Square to get cash fraudulently from one of their own accounts. For example, a business owner may run their credit card for a transaction on Square, and then, they take the cash out of their account when Square sends the payment. This tactic allows people to get around the fees for cash withdrawals, as the fees for credit card payments are significantly lower.
Retail Kiting
Retail check kiting is when someone gets a retail store involved in check kiting. For example, an account holder writes a check from Account A at a grocery store. Then, they deposit a check from Account B in Account A to cover the grocery store check. They may also write a check from Account A back to Account B to cover the check, and they may keep up this cycle until they have actual money to deposit.
Often, this scheme involves writing a check to a retailer for over the amount of purchase and then depositing the cash into the bank to cover a check previously written at the retailer. Again, the scheme becomes cyclical, and the perpetrator continues until they get real money to cover the checks or the bank discovers 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. In severe cases, unbridled check-kiting can 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 offer a range of tools and solutions to make fraud protection simple.