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Smaller forms of check kiting may go completely unnoticed. Elaborate check kiting schemes may go on until one of the banks involved is alerted or the check kiter stops, and it becomes apparent there are no funds. The entity harmed by check kiting is the bank that has allowed funds to be withdrawn from the new checking account without first waiting for funds to arrive from the paying bank (which can be protracted for international check payments). Banks combat this problem by not allowing funds to be withdrawn from an account until a certain number of days have passed, by which time the lack of funds in the payer’s account will have been discovered.
Retail Kiting
Banking services, credit, and debit card provided by The Bancorp Bank, N.A. Retail kiting is more common in suburban areas, where multiple supermarket chains exist within proximity. While it is more difficult to detect and prosecute, it involves lesser amounts of cash than circular kiting, and therefore is a lower threat. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice.
- On the following business day, the kiter writes a check on their bank B account to themselves and deposits it into his account at bank A to provide artificial funds allowing the check they wrote a day earlier to clear.
- Some fraudsters will continue kiting between several accounts without ever coming up with sufficient funds.
- You deposit a check on a Monday and have access to the funds on Tuesday.
- However, most countries do not have a float system and checks are not paid until they are cleared, so check kiting is impossible.
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A sophisticated check kiting scheme can result in multi-million dollar losses. The bottom line is check kiting is a form of check fraud — it’s illegal, and it’s something to be aware of when accepting checks as payment from others. Be conscious of what you have in your account, and only commit to spending what you have.
Check kiting is the illegal action of writing a check for an amount higher than what you have in your bank account. You rely on the fact that it takes at least a few days for a check to clear, buying you time to come up with the funds or allowing you to earn interest on funds you don’t have. Some fraudsters will continue kiting between several accounts without ever coming up with sufficient funds. Check kiting is a type of check fraud that occurs when someone purposely writes a check for more than they have and deposits it into a different account. Then, they use or earn interest on funds before the check can bounce.
What can banks do?
Following the transaction, the kiter deposits the cash received back into his/her bank on the same day in order to provide sufficient funds for other check to clear, while the check written that day will clear one or more business days later. This action is repeated as necessary until legitimate funds can be deposited into the account. Carried out within the banking system, kiting typically involves passing a series of checks at two or more banking institutions, using accounts that have insufficient funds.
Kiting or check-kiting is defined as the practice of covering a bad check from one bank account to another. Persons with multiple bank accounts use this advantage because it takes multiple days to process checks. The check that has been deposited increases the fund available. To counter kiting activities, many financial institutions have a waiting period before checks are deposited.
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Check kiting example #2
Reduced times for checks to clear has helped reduce the incidence of check kiting involving banks, as have such practices as banks placing holds on deposited funds and charging for returned checks. Check kiting is essentially taking credit, like a small loan, from a lender without authorization. It’s considered a form of bank fraud and is therefore illegal. While someone could bounce a check by mistake, check kiting is done on purpose and occurs repeatedly.
AccountingTools
The check kiter could simply lose their account/account benefits, or they could face legal action and even prison. Banks and other financial institutions should also strive to have security measures in place to identify check fraud. For example, deposit restrictions can help stop check kiting behavior by limiting the number of deposits, placing holds on high-dollar-amount checks, and more. In this example, the check kiter used the processing times to get access to a large amount of funds they didn’t have. Essentially, they took money from the bank as a form of credit.
In the Sixth Circuit, the Court defined check-kiting as drawing checks on an account from one bank and depositing them in an account in the other bank when both bank accounts have insufficient money to cover the amounts drawn; see U.S. v. Stone. The Court in United States v. Flowers decreed that kiting is an offense where the offender tricks two or more banks into inflating account balances by drawing money from insufficiently funded bank accounts. The Court stated that the offender in essence will be giving themselves their own unauthorized, unsecured, and interest-free loans, put banks at risk for funds, and short the banks’ assets. In United States v. Norton, the Court stated that check kiting could violate the federal bank fraud statute, 18 U.S.C. §1344 if the victim is a federally insured financial institution. Retail-based kiting involves the use of a party other than a bank to unknowingly provide temporary funds to an account holder lacking funds needed for check to clear. In these cases, the kiter writes check(s) to one or more places of retail (usually supermarket(s)) that offer cash back in addition to the amount of a purchase as a courtesy to their patrons.
This process is illegal and relies on the time it takes for checks to clear (verifying the funds are available), which is usually around 3 days but can be longer for international checks. Circular kiting describes forms of kiting in which one or more additional banks serve as the location of float, and involve the use of multiple accounts at different banks. On the following business day, the kiter writes a check on their bank B account to themselves and deposits it into his account at bank A to provide artificial funds allowing the check they wrote a day earlier to clear.
Be wary of others “accidentally” overpaying you or giving you a check and asking for money back. With the right awareness, you can help combat fraud and activity that puts your money at risk. Some kiting rings involve offenders posing as large businesses, thereby masking their activity as normal business transactions and making banks inclined to waive the limit of funds made available. The amount of funds grows with each transaction, and serious fraudsters might even bring more bank accounts into the mix. In a check kiting shell game, the funds are the “prize,” and the bank accounts are the “shells.” The prize gets passed back and forth between shells and can even grow if they earn interest on the non-existent funds.