Check kiting is a form of check fraud, involving taking advantage of the float to make use
of non-existent funds in a checking or other bank account. In this way, instead of being
used as a negotiable instrument, checks are misused as a form of unauthorized credit.
Kiting is commonly defined as intentionally writing a check for a value greater than the
account balance from an account in one bank, then writing a check from another account
in another bank, also with non-sufficient funds, with the second check serving to cover
the non-existent funds from the first account. The purpose of check kiting is to falsely
inflate the balance of a checking account in order to allow written checks, that would
otherwise bounce, to clear. If the account is not planned to be replenished, then the
fraud is colloquially known as paper hanging. If writing a check with insufficient funds
is done with the expectation they will be covered by payday– in effect a payday loan–
it is called playing the float. Some forms of check fraud involve the use
of a second bank or a third party, often a place of retail, in order to delay the absence
of funds in a transactional account on the day the check is due to clear at the bank.
Such acts are frequently committed by bankrupt or temporarily unemployed individuals or small
businesses seeking emergency loans, by start-up businesses or other struggling businesses
seeking interest-free financing while intending to make good on their balances, or by pathological
gamblers who have the expectation of depositing funds upon winning. It has also been used
by those who have some genuine funds in interest-bearing accounts, but who artificially inflate their
balances in order to increase the interest paid by their banks.
Circular kiting 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. In its simplest form, the kiter, who has two
or more accounts of his own at different banks, writes a check on day one to himself from
Bank A to Bank B, so funds become available that day at Bank B sufficient for all checks
due to clear. On the following business day, the kiter writes a check on his Bank B account
to himself and deposits it into his account at Bank A to provide artificial funds allowing
the check he wrote a day earlier to clear. This cycle repeats until the offender is caught,
or until the offender deposits genuine funds, thereby eliminating the need to kite, and
usually going unnoticed. Complex versions of this scheme have occurred
involving two separate people, each with an account at a different bank, constantly writing
checks to one another, or a group of individuals writing checks in a circular fashion, thereby
making detection more difficult. 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. Yet another variation called the 'endless
kite' involves checks imprinted with the logo, address, and name of Bank A but the routing
number of Bank B. Bank A does not recognize the routing number and returns the check to
the clearing house, where it is sent to Bank B, which does not recognize the account and
bank name, again returning the instrument to the clearing house, where the check cycles
endlessly. Retail-based kiting
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) that offer cash back
in addition to the amount of a purchase as a courtesy to their patrons. 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.
Concretely, suppose an individual has $10 in their bank account and no cash, but wishes
to purchase an item costing $100. Here is how the fraud is accomplished:
First, the individual writes a bad check for $100, and uses it to purchase the item – the
individual is now insolvent, as they owe $100, but only have $10 in the bank. However, the
check has not yet cleared. Second, they go to a retail establishment
and write another check for $100 and cash it, say check #2 on day T+0 – this is the
kiting. They then take the cash and deposit it in
their account, which now has $110, which is sufficient for the first check to clear, but
after this there are non-sufficient funds for check #2 to clear.
This process can be repeated, with the amount possibly increasing.
If the kiter then gets $100 cash on day T+1 and deposit in their account, check #2 clears
and the victims do not in fact lose money, and are none the wiser.
If, on the other hand, the kiter does not get enough cash and does not continue kiting,
then check #2 bounces, and the retail establishment has been defrauded – they have lost $100
cash in exchange for a bad check. The principle of retail kiting is that by
giving cash in exchange for a check, the retail establishment is providing check-cashing services
and taking credit risk on the check – it may be dishonored.
Another version of this scheme involves purchasing an item from a place of retail with a check,
and returning it promptly for a cash refund, followed by depositing that cash into the
transactional account. This is more difficult these days, as more places of retail will
delay a refund on purchases made by check. Retail kiting is more common in suburban areas,
where multiple supermarket chains exist within close 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. However, a 1999 episode of the CBS program Real TV showed
video surveillance of a man purchasing a single item with a check at a supermarket, obtaining
$50 cash back, the maximum allowed by the store, and depositing the cash into his account
at a bank branch within the store in order to prevent the other check from bouncing.
According to the show, an employee finding his behavior suspicious reported him to the
police, and the video was used in his prosecution. Corporate kiting
Corporate kiting involves the use of a large kiting scheme involving perhaps millions of
dollars to secretly borrow money or earn interest. While limits are often placed on an individual
as to how much money can be deposited without a temporary hold, corporations may be granted
immediate access to funds, which can make the scheme go unnoticed. This was the case
with E. F. Hutton & Co. in the early 1980s. Legal implications of check kiting
Check kiting is illegal in many countries. However, a majority of countries do not have
a float system and checks are not paid until they are cleared, so check kiting is impossible.
United States According to the United States Department
of Justice, check kiting can be prosecuted under several existing laws including those
against bank fraud, misapplication, or required entries. It can draw a fine of up to $1,000,000.00,
imprisonment for up to 30 years, or both, and many first-time offenders with no criminal
background have received stiff sentences. In addition to the federal penalties, state
law often provides for alternate civil and criminal consequences.
Although the United States prosecutes some paper hangers under federal law, most issuance
of bad checks in the United States is prosecuted as a state offense.
Laws vary from state to state, but one example is Ohio Revised Code 2913.11(2)(B), which
states: "No person, with purpose to defraud, shall issue or transfer or cause to be issued
or transferred a check or other negotiable instrument, knowing that it will be dishonored
or knowing that a person has ordered or will order stop payment on the check or other negotiable
instrument". Ordinarily, passing a bad check in Ohio is a misdemeanor, but large checks
or multiple checks within a six-month period aggregating to large amounts make it a 5th-,
4th-, or 3rd-degree felony, depending on the amounts involved.
Some states protect the careless by making the intent to defraud an element of the crime,
or exempting from punishment those that pay the check at a later date. For example, Indiana's
check deception statute states that it is a defense if the person issuing the check
"pays the payee or holder the amount due, together with protest fees and any service
fee or charge, ... within ten days after the date of mailing by the payee or holder of
notice to the person that the check, draft, or order has not been paid by the credit institution."
Furthermore, it is not a crime if "the payee or holder knows that the person has insufficient
funds to ensure payment or that the check, draft, or order is postdated", or "insufficiency
of funds or credit results from an adjustment to the person's account by the credit institution
without notice to the person." See also
Credit card kiting Bank fraud
Check fraud References