Check Kiting

CHECK KITING IS A FRAUD committed against a banking institution, in which the underlying premise is to gain access to deposited funds before they are collected from the institution upon which they are drawn. The scam usually involves several checking accounts spread between several banks. In effect, a bank deposits money into an account while waiting for cash to be processed from another account; while in actuality the other account holds no money. An example of check kiting would be as follows:

Monday. A prospective check-kiter deposits a $500 check from account A into account B; then shortly thereafter deposits a $500 check from account B into account A.

Tuesday. Another round of deposits are made as well as some partial withdrawals.

Wednesday. One bank collects its monies from account A, while another collects its monies from account B. There is no actual money in either account, with all checks being drawn on insufficient funds, just a float of alleged funds being transferred back and forth between the two accounts. The check-kiter creates fictional balances in each account where none exists to obtain the use of the cash balances. The process of kiting is an extension of a shell game, moving the prize (the alleged cash balance) from one shell to another. Only when the process is halted, either by an alert banking institution or by the kiter, is it discovered that no monies exist. It is all a con.

As the kiting process continues, the dollar amount rises, as well as the number of accounts. A recent case in Michigan involved 21 accounts and a $32 million loss. Affected banks are under no obligation to advise another bank of a possible kiting scam, as the last bank holding the checks is the banking institution that incurs the loss. According to the Office of the Comptroller of the Currency, banks incur approximately $12 billion losses annually from check kiting scams. Some would interpret this calculated use of the Expedited Funds Availability Act as aggressive cash-management; while others would declare it a criminal act.

Indications of a potential check kiting operation include: Several accounts owned, or controlled by, the same individual; identifiable patterns of transactions, including deposits, transfers, and withdrawals between those accounts; deposits drawn on other institutions by the same holder of the accounts the funds are being deposited to; and frequent inquiries into account balances, collected items, and cleared items.

Changes in applicable federal statutes (1990 amendment to Section 1344 of Title 18, U.S. Code) reduce the burden of proof in prosecuting check kiting, removing both the issue of intent and accepted complicity by the banking institution.