Kiting
From Wikicpa
(As know as) Check kiting is any sort of fraud that involves drawing out money from one bank account that does not have sufficient funds to cover the check. Most check kiting schemes are achieved with the use of two bank accounts.
Check kiters typically write a check on one account, then deposit into their second bank account (this type of check is referred to as a kite). Just before the check is submitted to the first bank for payment, the kiter then deposits a check written off the second bank account, which also has insufficient funds. This is possible due to the delay created by the collection of funds by one bank from the other (known as the float time), which creates an artificial balance. In accounts with interest that compounds frequently, this can provide a significant amount of profit for interest over time on top of other funds.
Such a circular scheme is nearly impossible to get out of and requires perpetuation if not expansion of the fraud in order to avoid detection. Simpler check kiting schemes are detected by bank computers based on the repetition of transactions. With the advent of electronic checks, float time is being significantly reduced, because banks are no longer required to mail paper checks from one institution to another. Also because a check may be closed out the same business day, a check kiter may have a check bounce if they are even slightly careless, and may not benefit from interest where it is based on end-of-day balances.
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Example
For instance, a check kiter might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the bank A account and deposits it in the bank B account. If the kiter has good credit at bank B, he will be able to draw funds against the deposited check before it clears, that is, is forwarded to bank A for payment and paid by bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days and then deposit it in the bank A account before the $50,000 check drawn on that account clears.
The term, first used in the mid 1800s, comes from "kite flying".
Law violation
Check kiting is illegal in the United States. The banking industry is heavily regulated and even insured by the U.S. government. According to the United States Department of Justice , check kiting can be prosecuted under several existing laws including those against bank fraud (18 U.S.C. § 1344), misapplication (18 U.S.C. § 656), or as a violation under 18 U.S.C. § 1005 (required entries). It can draw a fine of up to $1,000,000.00, imprisonment for up to 30 years, or both. In addition to the federal remedies, state law often provides for alternate civil and criminal consequences.
Prevention
Internal controls that can be used to identify suspicious activity:
- Require officer approval on withdrawals against uncollected funds, overdrafts and wire transfers. Such authority should be strictly enforced and not exceed an individual's lending authority.
- Daily reports should be required on withdrawals against uncollected funds, overdrafts, large items and significant balance changes.
- Designate an employee to regularly review internal reports to spot abnormal conduct and ensure proper investigation when the need arises.
- Establish a secondary level of administrative control to promote objectivity when granting significant drawings against uncollected funds or overdrafts.
- Forward overdraft activity reports to the board or an approved committee.
- Implement online analysis systems that shield banks against check kiting losses.
- Implement a check imaging system.
Modern status
Today check kiting is becoming almost impossible as software rapidly catches illegal activity at the teller/branch level instead of waiting for the nightly runs to the back office.
Source: bankers online.com
