Check kiting is an illegal scheme that exploits the time taken for checks to clear between two or more banking institutions. By writing checks on accounts with insufficient funds and depositing them in other accounts, perpetrators temporarily create artificial credit, which can be used before the checks are rejected for insufficient funds.
Mechanism of Check Kiting
Let’s break down the mechanism using an example:
- Empty Checking Accounts: The perpetrator, often known as a “kite,” maintains two checking accounts in separate banks, namely Bank A and Bank B.
- Writing a Check: The kite writes a check for a substantial amount, say $50,000, on the account at Bank A, which does not have sufficient funds.
- Depositing The Check: This check is then deposited into the account at Bank B.
- Drawing Against the Check: Due to the kite’s good credit history or banking practices, Bank B allows the kite to draw funds against the deposited check even before it clears.
- Clearing Period: The clearing process, during which the check from Bank B is sent to Bank A for payment, generally takes a few days.
- Using the Funds: During this clearing period, the kite uses the available funds. Before the check is returned unpaid, they must ensure that the Bank A account is funded to cover the withdrawn amount.
If done repeatedly and without additional funds being deposited, the scheme will eventually collapse as the checks will bounce, revealing the fraudulent activity.
Historical Context
Check kiting has existed since the introduction of checks and the banking system. It became more prevalent with the advent of more sophisticated banking facilities that allowed instantaneous recording but slower actual transfer of funds.
Legal Considerations and Consequences
Check kiting is considered a form of bank fraud and is illegal. The consequences for individuals caught engaging in this activity can be severe:
- Criminal Charges: Perpetrators can face criminal charges, including fines and imprisonment, under federal law.
- Restitution: Offenders often are required to repay the banks for the funds fraudulently obtained.
- Loss of Banking Privileges: Individuals involved in check kiting can have their banking privileges revoked and be blacklisted from opening accounts in other banks.
Prevention of Check Kiting
Banks implement several measures to prevent check kiting, including:
- Monitoring Accounts: Regular monitoring of accounts for unexpected large deposits and subsequent withdrawals.
- Delayed Funds Availability: Introducing policies that delay the availability of funds deposited by check until those checks clear.
- Electronic Clearing: Utilizing electronic clearing systems that expedite the check-clearing process, reducing the window of opportunity for kiting.
- Fraud Detection Software: Employing advanced software that flags suspicious banking activities.
Comparisons with Related Terms
- Check Fraud: Broader term that includes any fraud involving checks, such as altering or forging checks.
- Check Washing: A specific type of check fraud involving the stealing and altering of checks by removing ink with chemicals.
- Credit Card Kiting: Similar to check kiting but involves using credit cards to float by exploiting the billing cycle.
FAQs
What Are the Signs of Check Kiting?
Is Check Kiting Common?
How Can Individuals Protect Themselves?
Summary
Check kiting is a serious financial crime that manipulates the time lag in the clearing of checks to create temporary credit lines. Despite advancements in technology and banking practices to prevent such activities, it remains a significant concern within the financial industry. Understanding its mechanisms, consequences, and preventive measures can help protect both institutions and individuals from financial crime.
References
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