Check kiting is a type of fraud that involves using checks in a specific manner to access credit which isn’t actually authorized. In simple terms it enables the perpetrator to make use of funds they don’t actually have in the bank accounts in question. In simple terms, a check kiting scheme involves writing and issuing a check or bank draft in full knowledge that the funds to cover this check aren’t actually in place.
How check kiting works in practice
Check kiting takes advantage of the way in which the banking system deals with checks, and in particular what is known as the “float time”. This is the period that elapses between a check being deposited in one bank and clearing in another. The person carrying out the check kiting fraud will usually write a check at Bank A, against an account held at Bank B.
During the float time (so before the check clears), the perpetrator then withdraws the funds from Bank B and deposits them in Bank A. Having made a fraudulent withdrawal in this way, the perpetrator may then do the same thing in the opposite order (i.e. Bank B before Bank A) and may even repeat the process multiple times during the float time.
Measures to reduce the incidence of check kiting
In an effort to make check kiting much more difficult to carry out and less likely to succeed, banks have reduced the time it takes for checks to clear and introduced measures such as charging for returned checks and placing a temporary hold on deposited funds.
Kiting in the retail environment
Fraudsters may also engage in an activity known as “retail kiting”. This begins when the perpetrator cashes an initial bad check at a retailer when making a purchase. Before the check has time to clear – during the float time – they will then write a second check that includes a cashback amount, or sometimes consists only of a cashback amount. Although most cashback transactions now take place via debit cards, some retailers still offer cashback via check as a service and risk being targeted for this purpose.
The cash paid by the retailer for the second check is then deposited into the account so that the first check can clear. This leaves the second check still to clear, and the fraud is repeated in order to cover the amount of the second check. By repeating the fraud on an ongoing basis, a perpetrator could obtain a chain of items funded by fraudulent cashback transactions.
Check kiting through multiple accounts
On some occasions a check kiting fraud can be more long term than simply cashing a single fraudulent check. In some cases, the perpetrator might build a relationship with a bank that is based on mutual trust. For example, they then write and deposit a check from Bank A for $10,000 and a check for Bank B for $10,000 into an account at Bank C – the bank that the perpetrator has a long-term relationship with. In reality, the accounts in Bank A and Bank B don’t have enough money to cover the amount deposited in Bank C, but as soon as the funds become available, the perpetrator withdraws $20,000 from Bank C. By the time the bad checks have been returned, Bank C is $20,000 down and the perpetrator is presumably long gone.
We can help
If you’d like to know more about check kiting or are concerned that your business might fall victim to fraud please contact our experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.