Check Kiting - Unlimited, Yet Illegal, Cash Flow

Check Kiting is the act of drawing out excess money from a bank account when in fact, the account does not have enough funds to completely cover the check. It is a fraudulent scheme which takes advantage of the “float” or the time between the issuance of the check and the clearance at the bank. Two banks are used to create the illusion of having real assets or money in one thereby using the time of transfer to draw out extra cash

Check Kiting  is also called paper hanging. The last bank receiving the check usually reaps the loss from the fraudulent scheme. It is considered as criminal in nature since damages or losses incurred by the bank can be the cause of its failure or road to bankruptcy. Even today when clearing periods are much shorter and processed via computer-regulated systems, check kiting is still practiced.

This is an example of check kiting. The offender is a client of Bank 1 and Bank 2. The offender draws a check on Bank 1 to be deposited in Bank 2. Before the drawn check arrives in Bank 2 for deposit, another check is drawn on Bank 2 to be deposited in Bank 1. The offender makes use of the float or period before the checks are registered to be drawn and deposited. Thus, the last bank or Bank 1 is placed in a very vulnerable situation of paying Bank 2 with its own money.

How To Identify Check Kiting

There are certain features that may indicate that a check kiting scheme is in process or intended. An individual owning several accounts with similar names, frequently and excessively drawing uncollected funds, making large check deposits from foreign banks, frequently requesting account information, having huge debits and credits, having low collected funds than what appears in the bank statement or having low balance compared to deposit activity can be indicative of a check kiting activity.

How Is It A Crime?

Check kiting is a crime and is enforced by state law as a form of fraud. An individual is considered guilty of the crime if these elements are present.

1. Coverage of loss due to unpaid checks.

2. Check kiting is done by a depositor of the banks involved.

3. Two or more accounts in different banks wherein the offender is a client is involved.

4. Constant, systematic, back and forth deposits are made between two or more accounts.

5. Checks are used as a means to defraud or draw against uncollected funds creating the illusion.

6. There is clear and obvious intent to defraud the banks.

7. The banks are deceived by the fraudulent check deposits taking advantage of the float.

Penalties For Check Kiting

Check kiting is punishable by fines, imprisonment or both. Fines are equal to the total profit made from the false deposits plus additional charges for damage incurred in the operation and reputation of the banks involved. Offenders can be imprisoned from one to twenty years depending on severity of the offense. On most cases, orders and other documents provided by the defendant cannot be used to constitute a ground for dismissal of charges.

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