Check kiting is a form of financial fraud that takes advantage of the float, which is the time it takes for a check to clear. A check is deposited from one account to another and then withdrawn before the check clears. The world is fraught with check-kiting scams targeting individuals and businesses. The good news is you can take some simple actions to protect yourself.
For as long as finance has existed, so has financial fraud. In fact, one of the first recorded financial frauds took place in 193 A.D. An elite military unit of the Roman Empire, called the Praetorian guard, marketed themselves as having the right to sell the throne of the Roman emperor. Lo and behold, a guy named Julianus paid them 250 pieces of gold for every soldier in the army. In today’s numbers, that’s around $1 billion. However, the Praetorian guard never actually had the mandate to sell the throne, and the buyer, Julianus, was robbed of his money and decapitated. Earning money off of something you don’t actually have, but claim to, is the backbone of financial fraud. Today, a perfect example of this type of fraud is check kiting.
Check kiting is the process of writing a check for money that is not there, then depositing it into another account at a financial institution and withdrawing it. There is a time lag between when a bank receives a check and when it “clears,” called the float. There are several types of check fraud and kiting scams, from simple scams you could do yourself to much more complex frauds involving third parties and even corporations. Luckily, there are some easy ways to prevent yourself from getting kited by a third party.
Check kiting and its subvariants
The traditional method of check kiting is called circular kiting, and it has been around for a long time. However, as the financial system has grown more complex, check kiting has given birth to different subvariants. Here are some of the most common check kiting schemes.
Circular kiting is the simplest form of check kiting. For example, say you work with two different banks and have multiple accounts at each bank. You write a check from Bank A for $500. However, you only have $10 in your checking account at Bank A. You go to Bank B and deposit this check for $500.
You then go back the next day and withdraw the $500 in cash from Bank B before your original check from Bank A has time to clear or bounce. By then, you only had $10 but just withdrew $500. That same day, you write a check to Bank A to cover the amount of the $500 check you wrote for Bank B. So this cycle will continue until you get caught.
In a more advanced form of kiting, you would not only involve you and yourself but different people as well. You continuously write bad checks to each other, seeing how long you can take advantage of withdrawing hard cash during the float time.
You can protect yourself from banking scams by signing up for a checking account that offers fraud protection. Here are some options.
Retail check kiting
Retail check kiting, or retail kiting, works a lot like circular check kiting, except you involve a third party. This commonly works when retailers offer a cash-back scenario. Again, let’s take the example of having multiple accounts and $10 in your bank account in Bank A. You go to your local grocery store, write a check for $200, spend $20 at the grocery store and ask for $180 cash back. The store clerk has no idea if the check you wrote is good and thus hands you $180 in cash. You might then try to cover the check by writing another check to Bank A or making a small deposit. This cycle can continue until you get caught.
Corporate check kiting
Corporate kiting is a form of kiting that usually involves exponentially more money, and companies rather than individuals. This is most often done when receivable accounts are credited automatically even before the payment clears. The company can then use the non-cleared monetary credit to transfer to its shareholders and effectively spend the money that’s not there.
Endless kiting is a subvariant of kiting that takes advantage of the system in which checks are issued, received, and cleared. For instance, you take a check from Bank A to Bank B with the letterhead of the bank but the incorrect routing number. Bank B knows all the details of Bank A are correct, except the routing number. Bank A then receives the check back, but some other details are incorrect, so they send it to Bank B. The purpose of this is to confuse the banks by manipulating their compliance process. After a while, you will get caught.
How to protect myself from check kiting?
If you don’t want to be like Julianus and fall victim to financial fraud, here are some precautionary measures you can take to mitigate the risk of check kiting. (That is to say, if you aren’t reading this and thinking about doing it yourself. Stop! It’s illegal!)
Only accept a check for the money that is due
If a client or customer asks you to write a check for more than the amount they owe you, with the expectation of receiving the balance in cash, think twice about it. If you don’t know the person well, you might be unwittingly participating in a check-kiting scheme.
Don’t send money to people you don’t know
Even if you met someone online and he has a great cause for you to send money to, don’t do it. Most likely, he is located in Lagos, Nigeria, and not Chattanooga, Tennessee, supporting veterans. Scammers are just after your bank details and plan on draining your money.
Look at the sequencing of your checks
Check the sequences of the check numbers on your bank statements. If there are any strange checks and/or they seem out of sequence, act cautiously. Someone may have stolen your checkbook and is using it for a check-kiting scheme.
Learn to spot a fraud
Make sure you are aware of what fake checks and fraudulent manipulations of existing checks look like. The paper on a real check should be stiff, the ink should not smear, the check should have at least one perforated edge, and the bank’s official logo should be printed on the check.
Restrict access to checks
If you run a business, restrict who can write and access the business checkbook. Even if you trust the person, they might lose the checkbook. This could then be picked up by a person with check-kiting aspirations.
What is the purpose of check kiting?
The purpose of check kiting is to rip off a bank by withdrawing money with checks that haven’t cleared yet. You would do this through multiple banks, or the same bank with multiple branches.
Is check kiting illegal?
Yes, check kiting is illegal. If someone is convicted of check kiting, they could face these penalties:
- More than $500 – up to 5 years in prison and $10,000 in fines
- More than $250 but less than $500 – $3,000 in fines and up to one year in jail
- Less than $250 – $1,000 in fines and up to 90 days in jail
It can be a misdemeanor or a felony, depending on the context. The highest penalties can range from a $500,000 fine to up to 20 years in federal prison.
Do banks usually prosecute check kiting?
Yes. As it’s horrible for the banking system, they tend to prosecute it.
How do people get away with check kiting?
They may be causing confusion or moving too fast for the banks to catch up. Because of the circular nature of check kiting, the banks will eventually catch on, though.
Is check kiting money laundering?
It is not until it is. If either of the two checking accounts used in the check-kiting scheme is part of a larger money-laundering scheme, then you can get charged with both.
- Check kiting is a form of financial fraud in which perpetrators take advantage of “float time” to withdraw money from checks that have not cleared.
- Circular kiting is the original check-kiting scheme, but there are several subvariants, such as endless kiting schemes and retail kiting schemes.
- Taking precautions with your financial information and protecting the access to your checkbook are ways to mitigate the risk of becoming a victim of check kiting.
View Article Sources
- The Largest Financial Frauds in History – SPIA
- How To Spot, Avoid, and Report Fake Check Scams – Federal Trade Commission
- Beware of Fake Checks – FDIC
- SARs Identify Huge Check-Kiting Scheme by Auto Dealer – Financial Crimes Enforcement Network
- Fake Check Scams – AARP
- Check Kiting Penalties – Speas Law Firm