Definition: Check kiting is a fraudulent procedure where checks in transit are used to fund issued checks. It is a way to fool the bank by depositing a check from another entity to create a false positive balance that funds new checks being issued.
What Does Check Kiting Mean?
Check kiting schemes have existed for a long time and they are basically a way to exploit floating periods imposed by banks to clear certain transactions. These periods create an opportunity to defraud the institution. Basically, the scheme works like this: An individual deposits a check with no funds from Bank A in his account at Bank B. This first check creates a transitory balance on his account at Bank B.
Using that balance, the person issues or cashes a check against from Bank B. The false float created by the clearing process will back Bank B’s check and the check will be cashed successfully, but after the check gets cleared and bounces, the bank might deduct the check from the final recipient (normally a retail establishment) or the bank will take a loss as a result of the fraudulent procedure. Banks have implemented different measures to avoid check kiting.
For example, issued checks might not be cleared if the floating balance is not available at the time. That means retail business must protect themselves from giving cash advances to individuals with past fraudulent record, since they will be the ones experiencing the losses if a check kiting scheme is being performed.
Example
Mr. Hodges owns a retail store located at a small suburban neighborhood in Washington DC. He currently offers his clients cash advances backed by checks and charges a small commission to do so. He has a black list of known fraudulent individuals that usually use establishments like his to perform check kiting schemes. Recently, one of these individuals came to the store.
Mr. Hodges wasn’t available at the moment and one of his employees accepted a $300 check from the person and gave him $275 as a cash advance. Mr. Hodges wasn’t aware of the transaction until the check bounced. To avoid future situations like this one, he trained all his employees to identify defrauders quickly.
