Normally, the individual who writes a check for a purchase or bill payment on one day and hurries to the bank the next day to deposit funds has no intent to defraud a financial institution or business.
However, not everyone who floats funds is law-abiding and responsible. A problem exists with the few who take advantage of the system by exploiting technological and regulatory characteristics of financial institutions. The few individuals who practice check fraud, which includes check kiting, cost the nation an estimated $1 billion in losses annually.
The practice of “kiting” checks has been defined in a number of ways. The Office of the Comptroller of the Currency, in its “Policy Guidelines for National Bank Directors,” defines kiting as “a method whereby a depositor …utilizes the time required for checks to clear to obtain an unauthorized loan without any interest charge.”
ABA describes check kiting as “the process of floating worthless checks between accounts established in two or more banks.” ABA further states that “a kiter is able to create the impression of having a real balance in each of the banks by carefully timing deposits and checks, and taking advantage of the time needed for checks to clear.”
The Federal Bureau of Investigation defines check kiting as “a scheme which artificially inflates bank account balances, in accounts that are under common control, for purposes of obtaining unauthorized use of bank funds, through the systematic exchanging or swapping of checks between these accounts, in a manner which is designed to misuse the float that exists in the banking system.”
By any of these definitions, check kiting steps over the line from practice to crime when the purveyors of the activity intend to obtain something of value by trick, deceit, deception or swindle.
Who is it that engages in the practice of criminal check kiting? According to law enforcement experts, check kiters generally have a professional appearance and manner. The professional check kiter usually has a good working relationship with his or her financial institution regardless of whether the kiter has a legitimate or bogus business. This good relationship eventually works to the disadvantage of the bank because personnel are much less likely to be suspicious of “good” customers.
How can you tell if you and your financial institution are being victimized by a check kilo? Telltale account activity to look for when kiting is suspected includes:
- A high number of deposits-usually several per day.
- A high percentage of deposited funds coming from accounts under common control of the suspected kiter.
- Checks in float many times greater than closing bank balances.
- More “real” money is being taken out than put in.
- Deposit and withdrawal activity conceals negative actual balances.
- Total dollar debits and credits are almost equal.
- Many deposit items drawn on the same bank(s) or many checks payable to the same payee.
- Overdrafts covered with checks and not with cash.
- Checks written in “round” dollar amounts.
- Frequent inquiries regarding account balances.
- Frequent use of different bank branches.
- Frequent use of ATMs to make deposits.
In the past, prosecutors at all levels found it difficult to bring criminal charges against individuals involved in kiting activities. Laws required the prosecution to prove that the individual acted with the intent to defraud the financial institution. If charges were brought, defense attorneys were quick to use the “my client didn’t know” argument or assert that the “bank knew” what activities were occurring. In 1990, an amendment to Section 1344 of Title 18, United States Code, gave prosecutors a means by which check kiters could be charged more easily. The straight-forward language of this statute made it illegal for individuals to engage in or attempt to engage in any scheme to defraud a financial institution or obtain funds from a financial institu-tion by means of false pretenses.
In addition, the FBI has developed a computer-based analytical program that simplifies even the most complex of kiting schemes. The program makes schemes more under-standable to those with the task of investigating and prosecuting kiting suspects, and giving kiting cases much more jury appeal. It uses data derived from checks and bank state-ments of accounts involved in kiting schemes to prepare reports that greatly assist in creating graphical summaries of the kiting scheme. Many check loiters, when confronted with graphical summaries of their kiting activity, have opted to plead guilty rather than go to trial.
It 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 known as paper hanging instead. If writing a check with non-sufficient funds is done with the expectation that they will be covered by payday – in effect a payday loan – this is called playing the float.
Some forms of check fraud involve the use of a second bank or a third party, usually 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.