Check kiting is the deliberate issuance of a check for which there is not sufficient cash to pay the stated amount. The mechanics of this fraud scheme are as follows:
- Write a check for which there is not sufficient cash in the payer's account.
- Create a checking account at a different bank.
- Deposit the fraudulent check in the checking account that was just opened.
- Withdraw the funds from the new checking account.
The entity harmed by check kiting is the bank that has allowed funds to be withdrawn from the new checking account without first waiting for funds to arrive from the paying bank.
Banks combat this problem by not allowing funds to be withdrawn from an account until a certain number of days have passed, by which time the lack of funds in the payer's account will have been discovered. Also, there are a number of kiting indicators to look for, including the following:
- A large number of check deposits each day
- Many checks are drawn on the same bank
- A large proportion of cash in an account that has not yet cleared the paying bank
- Deposits are being made through multiple bank branches, in order to make the volume of deposits less obvious to the bank staff
Check kiting is extremely intentional. Someone engaged in kiting has a detailed knowledge of how long it takes for checks to clear the bank, and will take advantage of the timing delay to withdraw cash (even partial amounts) just before the bank discovers that there is a problem. A sophisticated check kiting scheme can result in multi-million dollar losses.
Kiting is particularly effective when an individual engages in a reasonable amount of normal check writing and depositing activities in an account over a period of time, so that the related account appears perfectly normal, and so is subject to fewer bank-imposed restrictions than might be the case for a newly-opened account.
A kiting scheme may involve multiple banks, where an individual is constantly shifting check payments among numerous accounts, just keeping ahead of the funds clearing mechanism. This can be a particular problem when a kiting scheme is finally shut down, for one of the banks in the group may be stuck with the bulk of the losses, depending on which checks were written from which accounts, and the timing of the payments.