Check kiting

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.[1] 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.[2] 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 – in effect a payday loan – it is called playing the float.[4]

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. In recent years, criminals have started taking advantage of the check float to pass fraud checks through solicited users of online auctions.[5]

An example of a check, an instrument potentially used for kiting.

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 (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 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.[4]

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.[6]

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 (usually supermarket(s)) 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:

The principle 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 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.[7] This was the case with E. F. Hutton & Co. in the early 1980s.[8]

Legal implications of check kiting

Check kiting is illegal in many countries.[9] 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 (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.[10]

Although the United States prosecutes[11] some paper hangers under federal law,[12] 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.[13]

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 (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."[14]

See also

References

  1. ↑ Congress and the rent-seeking society - Google Books. Books.google.com. Retrieved 2010-08-01.
  2. ↑ Criminal Law - Google Books. Books.google.com. Retrieved 2010-08-01.
  3. ↑ "Paperhanging - Definition". The Free Dictionary. Retrieved November 1, 2013.
  4. 1 2 Lundin, Leigh (2013-06-02). "The Digital Detective, Banking part 1". Financial Fraud. Orlando: SleuthSayers. Retrieved 5 August 2013.
  5. ↑ "Fake Checks | Consumer Information". www.consumer.ftc.gov. Retrieved 2016-02-27.
  6. ↑ Lundin, Leigh (2013-06-09). "The Digital Detective, Banking part 2". Financial Fraud. Orlando: SleuthSayers. Retrieved 5 August 2013. The Endless Kite
  7. ↑ In Good Faith - Google Books. Books.google.com. Retrieved 2010-08-01.
  8. ↑ The criminal elite: understanding ... - Google Books. Books.google.com. Retrieved 2010-08-01.
  9. ↑ "Check Kiting |Accountant Town". Accountant Town. Retrieved 1 November 2013.
  10. ↑ "807 Check Kiting". Justice.gov. Retrieved 2010-08-01.
  11. ↑ Identity theft and fraud Archived August 6, 2009, at the Wayback Machine.
  12. ↑ "Bank Fraud". Law.cornell.edu. 2010-06-28. Retrieved 2010-08-01.
  13. ↑ Anderson's Ohio Revised Code
  14. ↑ "Indiana Code". In.gov. 1990-12-31. Retrieved 2010-08-01.
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