Is Check Kiting Still Possible Today?
Investigate how modern banking technology and regulations have altered the feasibility of traditional check kiting.
Check kiting, a term often associated with past financial schemes, involved exploiting inherent delays in the banking system, leveraging the “float” time between when a check was written and when funds actually transferred. This article explores its mechanics, how modern banking technology has altered its possibility, and the regulatory frameworks now in place to prevent such activities.
Understanding Check Kiting
Check kiting is a deceptive practice manipulating bank account balances to access funds that do not genuinely exist. It relies on the “float” period, the time it takes for a check to clear. During this interval, a depositor might see their account balance artificially inflated with uncollected funds.
The intent is fraudulent, aiming to gain unauthorized access to money. Perpetrators create a false sense of security regarding available funds. While the deposited check appears to increase the account balance immediately, the underlying funds are not yet confirmed as legitimate. This temporary illusion of wealth forms the basis of the illicit scheme.
The Traditional Kiting Mechanism
Historically, check kiting involved a multi-step process to exploit banking system clearing times. An individual would open at least two bank accounts, often at different financial institutions. The core maneuver began with writing a check from an account with insufficient funds.
This check would be deposited into a second account. Due to processing delays, funds would appear available in the second account before the first bank discovered the deficit. The perpetrator would then withdraw cash or make payments from the second account, effectively accessing money that had not yet been collected.
To sustain the fraud, the individual would write another check from the second account and deposit it into the first. This cyclical movement of checks between accounts created an artificial inflation of balances, allowing the kiter to continue drawing uncollected funds. This continuous rotation was necessary to keep ahead of bank clearing processes and prevent the scheme from collapsing.
Modern Banking Technology and Prevention
Advancements in banking technology have diminished conditions for traditional check kiting. Real-time electronic funds transfer (EFT) systems dramatically reduce the “float” time. Many transactions, such as direct deposits and peer-to-peer payments, now process funds almost instantaneously, making it difficult to create an artificial balance.
The Check Clearing for the 21st Century Act (Check 21 Act) transformed check processing. This federal law authorized “substitute checks,” which are digital images of paper checks. Banks now process checks electronically, eliminating physical transport and accelerating the clearing process. This rapid digital exchange means checks often clear within hours, making it nearly impossible to withdraw funds before the originating bank identifies a lack of funds.
Automated fraud detection systems identify and prevent suspicious activities. These systems use sophisticated algorithms to analyze transaction data. They detect unusual patterns, flag anomalous deposits or withdrawals, and identify behaviors inconsistent with an account’s history. If a transaction exhibits potential fraud, these systems generate immediate alerts, allowing banks to investigate and block the transaction before any loss occurs.
Improved interbank communication networks, such as the Automated Clearing House (ACH) and Fedwire, contribute to reduced kiting viability. These networks facilitate rapid and secure transfers between financial institutions. This enhanced communication quickly alerts banks to insufficient funds or suspicious activity, leaving minimal opportunity for kiting schemes.
Regulatory Measures and Compliance
Beyond technological safeguards, regulatory measures and compliance requirements deter check kiting. The Federal Reserve Board’s Regulation CC, implementing the Expedited Funds Availability Act (EFAA), mandates banks make deposited funds available within specific timeframes. It also provides for “exception holds” on risky deposits.
Banks can extend hold periods for various reasons, including deposits into new accounts, large deposits, or redeposited checks previously returned unpaid. These exception holds allow financial institutions to verify fund legitimacy before availability, mitigating kiting risk. Banks must notify customers when holds are placed.
The Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations impose substantial obligations on financial institutions to monitor and report suspicious activities. Banks must file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) when they detect transactions indicative of money laundering, fraud, or other illicit schemes, including patterns suggesting kiting.
Financial institutions must file a SAR no later than 30 calendar days after detecting a basis for reporting. This regulatory scrutiny compels banks to maintain internal controls, conduct customer due diligence, and implement continuous monitoring. These frameworks make check kiting attempts more likely to be identified and reported.