Check kiting

From Wikipedia, the free encyclopedia

Check kiting is any sort of fraud that involves drawing out money from a bank account that does not have sufficient funds to cover the check. It is typically achieved by taking advantage of the float, the time between the negotiation of the check and its clearance at the check-writer's bank. This fraud is also known as paper hanging and carries a heavier pejorative connotation. Before the passage of the Check Clearing for the 21st Century Act,^[1] when checks could take 3 or more days to clear, playing the float was fairly common practice in otherwise-honest low-income families who encountered emergencies right before payday.^[2]

The most notorious bad check artist of the 20th century, Frank Abagnale, devised a scheme to put incorrect MICR numbers at the bottom of the checks he wrote, so that they would be routed to the incorrect Federal Reserve Bank for clearing. This allowed him to work longer in one area before his criminal activity was detected.^[3]^[4]

1 Methods of check kiting
2 Combating check kiting
3 Laws about check kiting
4 References
5 See also
6 External links

[edit] Methods of check kiting

There are various forms of illegal check kiting. The most common forms use two accounts at different banks, but a second account is not necessary to achieve all forms of kiting.

Circular kiting: Involves the use of two accounts at different banks. The kiter on one day writes a check to oneself 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/her Bank B account to him/herself and deposits it into his/her account at Bank A to provide artificial funds allowing the check s/he wrote a day earlier, plus all others due, to clear. This cycle repeats until the offender is caught, or until the offender deposits genuine funds, thereby eliminating the need to kite.

Similar versions of this scheme involve two separate people constantly writing checks to one another, or a group of individuals writing checks to one another 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 waiving the limit of funds made available.

Circular kiting is often used by individuals or small businesses with little or no money attempting to obtain a secret emergency loan, or business owners financing their operations by obtaining interest free loans. It has also been used by those who have some fund in interest-bearing accounts, but who artifically inflate their balances in order to increase the interest by their banks. Though their accounts are not technically in the hole, this is still considered to be a fraudulent act punishable by law.

Hit-and-run kiting: The kiter deposits a check one time that s/he knows is bad or possibly fictitious into his/her account. When the bank considers the funds available (usually on the next business day), but before the bank is informed the check is bad, the kiter then withdraws the funds in cash. The kiter knows the check will bounce, and the resulting account will have negative funds, but the offender will abandon the account and take the cash.

This form of kiting is seen more often in drug addicts and other petty criminals to obtain funds through a quick embezzlement. It is often conducted using a fictitious or stolen identity in order to hide that of the real offender.

Retail kiting: An accountholder who does not have funds for checks that have already been written to clear that day will write one or more checks to a place of retail (usually a supermarket) that will offer cash back in addition to the amount of a purchase as a courtesy to their customers. The kiter will then deposit the cash received back into his/her bank account on the same day in order to provide sufficient funds for checks to clear that day, while the check written for cash back will clear one or more business days later. This is often repeated as much as is necessary until legitimate funds can be deposited into the account.

Another version of this scheme is to purchase an item from a place of retail with a check, and return it the same day for a cash refund, then to deposit the cash into one's checking 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 have locations within close proximity. While it is more difficult to detect and prosecute, it involves the least amount of cash, and therefore is a lesser threat.

[edit] Combating check kiting

New technology is in place today is bound to make check kiting a thing of the past. As new software rapidly catches illegal activity at the teller/branch level instead of waiting for the nightly runs to the back office, schemes are not only easier to detect, but may be prevented before they are started by tellers who deny customers illegal transactions.

Circular and hit-and-run kiting are gradually being eliminated as checks will clear in Bank B the same day they are deposited into Bank A, giving no time at all for non-existent funds to become available for withdrawal. With image-sharing technology, the funds that temporarily become available in Bank A's account are wiped out the same day.

While there may still be some room for retail kiting, security measures taken by retail chains are helping reduce such incidents. Increasingly, more chains are limiting the amount of cash back received, the number of times cash back can be offered in a week or a given period of time, and obtaining checking account balances before offering cash back, thereby denying it to those with low balances (i.e. under $250), even when funds are sufficient to cover the amount on the check. Customers who are noted to obtain cash back frequently are also investigated by the corporation to observe patterns.

Some businesses will also use the check strictly as an informational device to automatically debit funds from the account on the spot, and will return the article to the customer thereafter. This will prevent any bounced checks, and all other forms of fraud that can be committed with one's own account.

[edit] Laws about check kiting

Check kiting is illegal in the United States. The banking industry is heavily regulated and even insured by the U.S. government. 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 as a violation under 18 U.S.C. § 1005 (required entries). It can draw a fine of up to $1,000,000.00, imprisonment for up to 30 years, or both. In addition to the federal remedies, state law often provides for alternate civil and criminal consequences.

Although the United States prosecutes^[5] some paper hangers under federal law,^[6] most uttering of a bad check in the United States is prosecuted as a state offense.

Laws will vary from state to state, but in Ohio, Revised Code 2913.11(2)(B) says "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-class felony, depending on the amounts involved.^[7]

Although not in Ohio, some states protect the careless and the mathematically-impaired with regard to the "with purpose to defraud" provision. Indiana's statute IC 35-43-5-5 holds 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, which may not exceed the greater of twenty-seven dollars and fifty cents ($27.50) or five percent (5%) (but not more than two hundred fifty dollars ($250)) of the amount due, that may be charged by the payee or holder, 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's 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."^[8]