What Is Check Kiting? With an Example

Financial fraud encompasses a wide range of deceptive practices designed to gain unlawful financial advantage. These schemes can involve individuals, businesses, or even organized groups, targeting various financial systems and institutions. Check kiting is a specific type of financial deception that manipulates the banking system, involving checks and bank accounts, to create an illusion of available funds.

Understanding Check Kiting

Check kiting is a type of check fraud that exploits the time delay, known as the “float,” between when a check is deposited into an account and when the funds are actually debited from the payer’s account. This fraudulent activity involves intentionally writing a check for an amount greater than the balance in the account. The purpose is to falsely inflate the balance of a checking account, allowing checks to clear that would otherwise not have sufficient funds.

The scheme essentially uses non-existent funds as unauthorized credit. While credit cards and mobile payment methods are increasingly common, checks remain in use, making kiting possible.

Mechanics of a Check Kiting Scheme

A check kiting scheme typically involves at least two bank accounts, often held at different financial institutions. The perpetrator opens an account, for example, Account A at First Bank, and another, Account B at Second Bank. The process begins when an individual writes a check from Account A, despite having insufficient funds, and deposits it into Account B.

Before Second Bank can determine that Account A lacks sufficient funds, the individual withdraws money from Account B. To prevent the initial check from bouncing, another check is then written from Account B and deposited back into Account A. This continuous movement of funds between accounts creates artificially inflated balances.

This cycle can be repeated, sometimes with increasing amounts, to maintain the appearance of solvency. Financial institutions work to detect these patterns, which often include frequent deposits and withdrawals, or an unusual number of transfers between accounts.

Illustrative Example of Check Kiting

Consider Sarah, who has two bank accounts: one at City Bank (Account A) with a balance of $100, and another at Regional Bank (Account B) with a balance of $50. Sarah needs $1,000 immediately but does not have the actual funds. On Monday morning, Sarah writes a check for $1,000 from Account A at City Bank and deposits it into Account B at Regional Bank.

Regional Bank makes a portion of the deposited funds available almost immediately, perhaps $500, even though the check from City Bank has not yet fully cleared. Sarah then withdraws this $500 from Account B. Later that same day, or on Tuesday, Sarah writes a check for $1,000 from Account B at Regional Bank and deposits it into Account A at City Bank.

This deposit makes $1,000 appear available in Account A, despite the fact that the check from Regional Bank is also drawn on insufficient funds. Sarah might then withdraw another $500 from Account A. This back-and-forth continues, creating a constantly shifting, artificial balance in both accounts.

Motivations Behind Check Kiting

Individuals engage in check kiting for various reasons, often driven by a need for immediate access to funds they do not possess. A primary motivation is to obtain unauthorized, interest-free credit. This allows them to cover short-term cash flow problems or to address unexpected financial shortfalls.

Some individuals use this scheme to bridge the gap until their next legitimate deposit, such as a paycheck, hoping to prevent checks from bouncing. Others might attempt to artificially inflate a business’s bank balance, creating a false impression of financial stability. This could also be an attempt to deceive auditors into believing a company has more cash than it actually holds.

Legal Nature of Check Kiting

Check kiting is an illegal activity. It is considered a form of bank fraud or financial crime. The act is not merely a mistake, such as an accidental bounced check, but a deliberate scheme intended to defraud financial institutions. It is a prosecutable offense.