Key Takeaways
- Check kiting exploits bank float to create fake funds.
- Involves writing checks from insufficiently funded accounts.
- Illegal; leads to bank losses and legal penalties.
What is Kiting?
Kiting is a type of check fraud that exploits the time delay, or "float," between banks when processing checks, allowing individuals to temporarily inflate account balances using non-existent funds. This tactic involves writing checks from accounts with insufficient funds and depositing them into other accounts to create unauthorized credit.
The scheme depends heavily on the provisional credit banks provide before verifying funds, which can lead to bounced checks and financial losses for institutions.
Key Characteristics
Understanding kiting's defining traits helps you recognize and avoid this fraudulent practice.
- Float Exploitation: Kiting leverages the delay in check clearing between banks to access fake funds temporarily.
- Multiple Account Use: Fraudsters often cycle funds between two or more accounts to sustain the illusion of sufficient balances.
- Provisional Credit Abuse: Banks may credit deposits immediately, enabling withdrawals before checks clear, which kiting manipulates.
- Illegal Activity: Kiting is distinct from legitimate overdraft or NSF occurrences and is punishable by law.
- Potential for Large Losses: Institutions like Bank of America can suffer significant financial damage from kiting schemes.
How It Works
Kiting typically starts with writing a check from an account lacking sufficient funds and depositing it into another bank account. Due to the float, the second bank credits the deposit immediately, allowing withdrawals before the check bounces.
To maintain the deception, the individual writes a compensating check from the second account back to the first, creating a cycle that artificially inflates balances until real funds are added or the scheme collapses. This technique can involve two or more accounts to prolong the cycle and increase the amount fraudulently accessed.
Examples and Use Cases
Below are common scenarios where kiting occurs, illustrating its practical impact.
- Retail Fraud: Writing a $100 NSF check for purchases and using small cash deposits to cover previous bad checks, cycling until actual funds arrive.
- Bank Scenarios: A fraudster might deposit a $500 NSF check into an account at Citigroup, withdraw the funds, then cover the check later before discovery.
- Multi-Account Kiting: Cycling $5,000 checks among three accounts to withdraw $10,000, leaving one account severely overdrawn.
- Corporate Cases: Large-scale kiting has led to federal convictions involving millions in fraudulent withdrawals, similar to schemes detected by advanced online banking fraud monitoring systems.
Important Considerations
Kiting is illegal and carries severe consequences including fines and imprisonment. Even unintentional use of the float to cover payments can be prosecuted if done knowingly. Financial institutions combat kiting with fraud detection tools and deposit holds.
If you manage accounts or investments, it’s critical to understand related risks like Ponzi schemes and leverage misuse, which share the theme of abusing financial systems, to protect your assets and comply with regulations.
Final Words
Check kiting exploits timing gaps in check processing to create unauthorized credit, posing serious legal and financial risks. Protect your accounts by monitoring transactions closely and avoiding overdrafts; if you suspect unusual activity, contact your bank immediately.
Frequently Asked Questions
Check kiting is a type of fraud where someone exploits the delay in check processing between banks to create fake balances using non-existent funds. By writing checks from accounts with insufficient funds and depositing them into other accounts, they take advantage of the float period before checks clear to access unauthorized money.
Fraudsters often use several accounts across different banks to shuffle funds and delay detection. For example, they might deposit NSF checks from two accounts into a third, withdraw large sums, and keep cycling checks among accounts to maintain the illusion of real money.
Common examples include writing NSF checks at stores with the intention to cover them later by cycling cash back into accounts, depositing fake checks to withdraw funds before they bounce, and large-scale schemes where millions are overdrawn by moving funds between multiple banks.
Check kiting is illegal because it deceives banks into providing unauthorized credit, violating federal bank fraud laws such as 18 U.S.C. §1344. Many states also have laws against it, and those caught can face criminal charges, fines, and imprisonment.
Penalties for check kiting can include hefty fines exceeding $500,000, several years in federal prison, and civil lawsuits to recover losses. The severity depends on the scale of the fraud and the amount of money involved.
The float period, or the time it takes for a check to clear, is usually between 1 to 3 business days. This delay allows fraudsters temporary access to unverified funds before the bank realizes the checks are from insufficiently funded accounts.
Yes, if the fraudster manages to cover the bad checks with real funds before they bounce, the scheme may go undetected temporarily. However, if the cycle collapses or funds are insufficient, banks and merchants face losses and the fraud is uncovered.
