What Is Check Kiting Fraud?February 2, 2022
Check kiting is the illegal act of writing a check from a bank account with insufficient funds and depositing it into a different account. Once you deposit the check into another account, you withdraw the money from that account before the original check bounces. Both individuals and scam operations can perform check-kiting.
In the case of an individual, they try to profit by duping their banking institution. In the case of a scam operation, they try to write counterfeit checks and withdraw money from the accounts before they clear. To avoid check kiting, you should never wire money to strangers, and you should always know who you are dealing with when you’re communicating with financial institutions.
If you’re sending checks via an online check mailing service, be sure they’re reputable, and others have used their services. Banks keep an eye on reg flags for check-kiting. However, with online check mailing services, customers know how long their checks will take to clear, and they generally only take up to 48 hours.
This blog discusses what check-kiting fraud is, how banks have responded to it, what tools exist that help eliminate it, and the legal measures involved. Use it as a guide to help ensure you’re not taken advantage of and that you understand how to use these tools to avoid check-kiting.
What Is Check Kiting?
Check kiting, also referred to as “flagging” and “taking advantage of the float,” is a check fraud that can be a federal crime. Check-kiting criminals usually prey on international checks since they take banks longer to validate. The term “taking advantage of the float” comes from a check’s “float time,” the time it takes a check to clear.
Kiting can continue without hesitation or until the account holder withdraws enough funds from their withdrawal account to get their negative account into the positive. For example, someone has insufficient funds in account A. They write a check for $1000 from account A and deposit it into account B. Because the bank takes 3-5 days to clear the check, they might withdraw money from account B and deposit it into account A to net a profit.
The Four Primary Types of Check-Kiting:
Circular kiting- Circular kiting utilizes multiple accounts at multiple banks that can be in the same name, different names, or a combination of both. In circular kiting, account holders deposit checks with increasing amounts of money into each account, exponentially increasing their profit over time.
Endless kite- Endless kiting is when the kiter uses a check printed with the name and logo of bank A but the routing number of bank B. Because it has these elements, and bank A doesn’t recognize the routing number, it sends the check to bank B. Because bank B doesn’t recognize the logo and name on the check, it sends the check back to bank A. This “endless” process can continue well after the bank credits funds to the holder’s account.
Retail-based kiting- Retail-based kiting refers to kiting that uses an outside party that is not a bank to authorize transferring funds to an account holder. An example of this type of check-kiting fraud would include writing a check at a grocery store and electing to get cashback without the appropriate funds in your account.
Corporate Kiting- Some large corporations don’t have any limits on their credit or debit accounts. Corporate kiting happens when nefarious managers or executives secretly borrow money from these accounts. When these accounts don’t have limits on how much of their deposits get credited, people involved in the organization have the opportunity to write fraudulent checks and reap their rewards.
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How Do Banks Guard Against Check Kiting?
In the old days, banks and retail outlet stores sent full-scale audit teams to their branches to conduct audits on their check processing every quarter. They would spend two weeks combing through their checks and making sure they were balanced.
While some banks still use this process, faster, more efficient methods routed in cybersecurity exist. A study conducted by forensicstrategy.com found the following methods are defenses banks can implement to avoid check-kiting:
- Frequent officer approval for wire transfers, overdrafts, and uncollected funds.
- Daily reports of uncollected funds, overdrafts, large items, and noticeable balance changes
- Frequent review of internal reports to identify suspect conduct and coordinate proper investigation
- Secondary administrative control separated from other lending functions
- Routine overdraft activity reports to the board of directors or subcommittees.
- Reviews conducted by independent auditors assessing and legitimizing uncollected funds
Banks can also use independent fraud examiners as an effective fraud detection measure. These reviews help prevent losses and scandals while at the same time assuring the banks’ board of directors that adequate preventative measures are in place.
What Are the Consequences of Check Kiting?
The legal consequences of check-kiting can be extremely harmful. It is illegal, and the government considers it fraud. The legal penalties often depend on the size of the bank and the infraction’s severity level. In some instances, the bank may let the offender pay back their dues and keep their accounts. Banks often remove privileges from account holders in these cases.
Banks may also report check kiters to consumer agencies such as Experian or TransUnion. In more severe cases, check kiters can face fines and imprisonment.
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Steer Clear of Check-Kiting
Check-kiting is a serious infraction that you should not take lightly. Luckily, banks have cybersecurity services that issue warnings and respond to threats. Still, it’s essential to understand how to avoid these financially harmful situations. Using a reliable check printing company and steering clear of sketchy situations that require urgent check deposits will help you avoid any threats.