The occurrence of check kiting is becoming more rare, by comparison to other fraud types, as float time between checks gets shorter, but it’s still a problem…one that can cost a financial institution a lot of money if they have to take a loss on it.

What is check kiting?

Check kiting is knowingly depositing and drawing checks between accounts at two or more banks to take advantage of the float time. That’s the specific banking definition.

Let me break it down for you.

Suzie has two banks, bank A and bank B. Suzie writes a check drawn on bank A and deposits it in bank B. Assuming she is given immediate credit on that check, the funds cover any items clearing and bank B remains at a positive balance. But, Suzie didn’t really have the funds in bank A to begin with, so to avoid an overdraft fee, she writes a check from bank B and deposits it into bank A, which then covers the check she wrote to bank B in the first place. This pattern is likely to continue until she gets caught or until she deposits actual money into the accounts.

But, kiting doesn’t stop there. It can get more complex. In the above example, it is easier for a financial institution to catch kiting when only one person is involved. The more people and the more banks, the more difficult it is track down.

So, let’s say Suzie’s husband Jim has accounts with bank C and bank D. Let’s also say Suzie writes him a check from her account at bank A – where the funds don’t exist – and Jim deposits it at bank C. He then writes Suzie two checks, one from bank C and one from bank D, which she deposits at bank A and bank B. Jim’s check to Suzie covers the check she wrote to him, and his other check gives her credit for anything that may be clearing. But now, Jim’s accounts are in danger of being overdrawn, so Suzie writes two more checks and the process begins again.

If your head is spinning, welcome to my world! As a new accounts representative, this is something we have to watch out for and one of the biggest reasons we place holds on new accounts. We don’t want your kiting business. It’s a hassle.

But more and more financial institutions are taking a loss on kiting as it seems to have picked back up, especially with unemployment rates climbing…hence the post. And the thing is, most of you guys have probably done it a time or two – not to the extent of the examples above, but if you’ve ever gone to the grocery store two or three days before payday and written a check that you didn’t have funds in your account to cover at that moment, that’s kiting. You knowingly wrote a check that you did not have funds to cover and took advantage of the float time. Now, in cases like this, if it comes through before your payroll hits, the financial institution slaps you with a fee and moves on. This kind of kiting – unless it becomes habitual and extends beyond just the occasional grocery shopping – isn’t something we’re concerned with. It doesn’t usually cost us money.

The kind of kiting we’re concerned with is the stuff like my examples above. It’s even worse if the accounts are set up in fictitious names and social’s because we really take a loss on those.

Does this stuff REALLY happen?

Absolutely. As I said at the beginning, kiting was getting to a point where it was rare to have happen because float times have decreased significantly, especially with the advent of Check 21 – which, if you’re unfamiliar with, basically means merchants are running your checks electronically. But, with unemployment rates so high, people are looking for ways to survive and kiting certainly buys them some time.

My credit union had a situation where a customer opened a business account with us. Now, this may not be the case in all states, but in Texas, if a customer opens a business account and a check is made payable to the business, it must be deposited into an account styled the same way. They cannot cash it or draw less cash off of the check. If they need cash, they have to do a separate withdrawal. The reasoning is actually kind of stupid, but that’s the rule.

Anyway, at the time this transpired, we had a manager that was allowing this NEW business owner to do things he wasn’t supposed to be doing, like cashing $15k+ checks made payable to the business. But, he was also writing checks from his other bank account and depositing them with our credit union. I found it kind of odd that he would be doing that myself, but this other manager insisted that it was fine. That’s all well and good to do at your own branch if you want to take the loss, but not at mine. The member came to my location and I refused to cash the check, he could deposit it if he’d like and I’d also be placing a hold since the last two checks he’d deposited off of his other account had been returned NSF.

Well, he didn’t like that and went and saw the other manager, who called my manager and said I was purposely making things difficult for members. As it turns out, this guy was writing checks from his other account to deposit with us to cover the checks he was writing from us to cover his other account. He was kiting. He slipped up a few times and didn’t make the deposit on time, which accounted for the two NSF checks. But, the real kicker to all this is that it resulted as a $16k loss because he filed for bankruptcy. If the manager had been doing their job, they would have realized what he was doing sooner and could have put a stop to it.

Penalties

I’m not entirely sure what happened with the loss from the story above because once I was done with my report on the story, I was out of it. But, even though he filed for bankruptcy, depending on the chapter, we may still see some money from that because he committed fraud.

Like I said, if you’re floating checks at the grocery store once a month waiting on that paycheck to come in, we’re not going to bust you for fraud. But, if you’re purposely trying to defraud the system and it becomes obvious to us that that’s what you’re doing, then we can press charges for fraud. Repeated offenders could have fines as high as $1 million and/or 30 years in jail. Now, realistically, I don’t think that’s going to happen for kiting unless there’s a slew of other things you’re doing too. However, even first time offenders who have been convicted have had pretty stiff sentences. Most are required to pay the amount owed, plus a fine preset by the court. If you can’t pay the fine, you’ll do jail time instead.

Changes you may see…

Because this is becoming a bigger problem, you may find that your bank is placing more and more items on hold. They may not have had a strict policy about it in the past, but the thing is, we’re taking a lot of losses on fraud checks and kiting, so we have no choice but to move into an offensive position. Even if you’ve been with your financial institution some number of years, a personal check written from you and being deposited into your own account is something your bank may consider a hold on. If you don’t want that to happen, get cash or a cashier’s check.

You may not notice holds, but your bank could subtly (or not so subtly, in some cases) ask you to use their online ACH feature. Electronic transfers guarantee we get the funds or the transfer doesn’t take place. In some cases where kiting has been known to be going on, the financial institution could limit certain features to the account or simply shut it down altogether.

What questions do you have about kiting? Is this something you’ve done – maybe not the fraudulent stuff, but the floating at the grocery store – not realizing it was that big of an issue? How do you think financial institutions should handle this problem?

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