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Check kiting or cheque kiting (see spelling differences) 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.
The term "check kiting" first came into use in the 1920s. It stemmed from a 19th century practice of issuing IOUs and bonds without any collateral. That practice became known as "flying a kite", as there was nothing to support the loan besides air. [1]
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. [2] The purpose of check kiting is to falsely inflate the balance of a checking account in order to allow written checks to clear that would otherwise bounce. If the account is not planned to be replenished, then the fraud is colloquially known as paper hanging. [3] If writing a check with insufficient funds is done with the expectation they will be covered by payday 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 to increase the interest paid by their banks. Criminals have taken advantage of the check float to pass fraudulent checks through solicited users of online auctions. [4]
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 at different banks, writes a check on day one to themselves from bank A to bank B (this check is referred to as the kite), 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 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. 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 circularly, 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.
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 checks to one or more places of retail (usually supermarkets) 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.
The principal basis of retail kiting is that by giving cash (which is immediately available, and whose deposits clear faster than checks do) 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 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.
For example, suppose an individual has $10 in a bank account and no cash, but wishes to purchase an item costing $100. Here is how the fraud could be accomplished:
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. [5] This was the case with E. F. Hutton & Co. in the early 1980s. [6]
Check kiting is illegal in many countries. However, most countries do not have a float system and checks are not paid until they are cleared, so check kiting is impossible.
According to the United States Department of Justice, check kiting can be prosecuted under several existing laws including those against bank fraud (18 U.S.C. § 1344), misapplication (18 U.S.C. § 656), or required entries (18 U.S.C. § 1005). 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. [7]
Although the United States prosecutes some paper hangers under federal law, [8] [9] 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. [10]
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 later. 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 (10) 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." [11]
A dishonoured cheque is a cheque that the bank on which it is drawn declines to pay (“honour”). There are a number of reasons why a bank might refuse to honour a cheque, with non-sufficient funds (NSF) being the most common, indicating that there are insufficient cleared funds in the account on which the cheque was drawn. An NSF check may be referred to as a bad check, dishonored check, bounced check, cold check, rubber check, returned item, or hot check. Lost or bounced checks result in late payments and affect the relationship with customers. In England and Wales and Australia, such cheques are typically returned endorsed "Refer to drawer", an instruction to contact the person issuing the cheque for an explanation as to why it was not paid. If there are funds in an account, but insufficient cleared funds, the cheque is normally endorsed “Present again”, by which time the funds should have cleared.
A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share account at credit unions, is a deposit account or bank account held at a bank or other financial institution. It is available to the account owner "on demand" and is available for frequent and immediate access by the account owner or to others as the account owner may direct. Access may be in a variety of ways, such as cash withdrawals, use of debit cards, cheques and electronic transfer. In economic terms, the funds held in a transaction account are regarded as liquid funds. In accounting terms, they are considered as cash.
Cheque clearing or bank clearance is the process of moving cash from the bank on which a cheque is drawn to the bank in which it was deposited, usually accompanied by the movement of the cheque to the paying bank, either in the traditional physical paper form or digitally under a cheque truncation system. This process is called the clearing cycle and normally results in a credit to the account at the bank of deposit, and an equivalent debit to the account at the bank on which it was drawn, with a corresponding adjustment of accounts of the banks themselves. If there are not enough funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked as non-sufficient funds.
Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence.
A giro transfer, often shortened to giro, is a payment transfer from one current bank account to another bank account and initiated by the payer, not the payee. The debit card has a similar model. Giros are primarily used in Europe; although electronic payment systems exist in the United States, it is not possible to perform third-party transfers with them. In the European Union, the Single Euro Payments Area (SEPA) allows electronic giro or debit card payments in euros to be executed to any euro bank account in the area.
Cheque fraud, or check fraud, refers to a category of criminal acts that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. Most methods involve taking advantage of the float to draw out these funds. Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period to cover the fraud, and paper hanging, where the float offers the opportunity to write fraudulent cheques but the account is never replenished.
A traveller's cheque is a medium of exchange that can be used in place of hard currency. They can be denominated in one of a number of major world currencies and are preprinted, fixed-amount cheques designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a contract, which promises the payment of money without condition, which may be paid either on demand or at a future date. The term has different meanings depending on its use in the application of different laws and depending on countries and contexts. The word "negotiable" refers to transferable and "instrument" refers to a document giving legal effect by the virtue of the law.
A cheque is a document that orders a bank, building society to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account where the money is held. The drawer writes various details including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay the amount of money stated to the payee.
A cashier's check is a check guaranteed by a bank, drawn on the bank's own funds and signed by a bank employee. Cashier's checks are treated as guaranteed funds because the bank, rather than the purchaser, is both the drawee and drawer and is responsible for paying the amount. They are commonly required for real estate and brokerage transactions.
In economics, float is duplicate money present in the banking system during the time between a deposit being made in the recipient's account and the money being deducted from the sender's account. It can be used as investable asset, but makes up the smallest part of the money supply. Float affects the amount of currency available to trade and countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade.
Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments.
An overdraft occurs when something is withdrawn in excess of what is in a current account. For financial systems, this can be funds in a bank account. In these situations the account is said to be "overdrawn". In the economic system, if there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.
A banker's draft is a cheque provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn by the bank, and drawn on another bank or payable through or at a bank. In Canada, the term "bank draft" includes both this kind of check and, in practice almost always, the instrument known elsewhere as a cashier's check.
In banking, a post-dated cheque is a cheque written by the drawer (payer) for a date in the future.
The Green Dot Corporation is an American financial technology and bank holding company headquartered in Austin, Texas. It is the world's largest prepaid debit card company by market capitalization. Green Dot is also a payment platform company and is the technology platform used by Apple Cash, Uber, and Intuit. The company was founded in 1999 by Steve Streit as a prepaid debit card for teenagers to shop online. In 2001, the company pivoted to serving the "unbanked" and "underbanked" communities. In 2010, Green Dot Corporation went public with a valuation of $2 billion. Since its inception, Green Dot has acquired a number of companies in the mobile, financial, and tax industries including Loopt, AccountNow, AchieveCard, UniRush Financial Services, and Santa Barbara Tax Products Group.
A demand draft (DD) is a negotiable instrument similar to a bill of exchange. A bank issues a demand draft to a client (drawer), directing another bank (drawee) or one of its own branches to pay a certain sum to the specified party (payee).
A proof of funds (POF) is a document such as a bank statement proving that a person or a company has the financial ability to perform a transaction or meet a potential future liability. The POF can be issued by a bank, a financial institution or a trade finance provider.
In financial transactions, a warrant is a written order by one person that instructs or authorises another person to pay a specified recipient a specific amount of money or supply goods at a specific date. A warrant may or may not be negotiable and may be a bearer instrument that authorises payment to the warrant holder on demand or after a specific date. Governments and businesses may pay wages and other accounts by issuing warrants instead of cheques.
Zelle is a United States–based digital payments network run by a private financial services company owned by the banks Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank, and Wells Fargo. The Zelle service enables individuals to electronically transfer money from their bank account to another registered user's bank account using a mobile device or the website of a participating banking institution. There is no fee or charge on the transaction.
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