Kiting

Kiting is an illegal method of obtaining unauthorized credits in their bank account by using fraudulent means like issuing a negotiable financial instrument without sufficient bank balance, mentioning a false amount or date, or misrepresenting already availed credit finance to obtain more funds.

It may involve a check, securities, and retail kiting. Certain checks and monitoring mechanisms need to be implemented to identify and prevent a kiting transaction. Consequences and penalties vary on the nature and value of such transactions undertaken by the offender. It also mainly affects the stems of banking/ financing industries.

• Kiting is an illegal approach to obtaining unauthorized credits in their bank account. It utilizes fraudulent measures like issuing a negotiable financial instrument with an insufficient bank balance, indicating a false amount or date, or misrepresenting already availed credit finance to get more funds.
• Kiting is the criminal act of misusing banking financial instruments to obtain unauthorized credits or to avoid a specific debit impact. 
• Certain checks and monitoring mechanisms must be implemented to detect and prevent kiting transactions.

Kiting can be defined as a criminal act of misusing banking financial instruments to obtain unauthorized credits in bank a/c or to avoid a particular debit impact.

Check kiting may involve writing cheques with an insufficient bank balance, or a person with two bank accounts may write a cheque on one bank in favor of the second bank for clearing its dues and bank balance in the first bank. Then, he writes a cheque in favor of the first bank on the second day, creating a virtual bank balance. This process continues until the person gets caught.

Kiting in banking involves in banking financial instruments and can also be done on securities when any securities firm does not honor the settlement of the buying-selling transaction or floats with timelines issued by regulatory authorities, i.e., three days settlement period.

If a firm fails to receive securities within the settlement period, it must buy from the open market to net off the transaction. If such firms knowingly fail to buy short securities, it will be considered a delinquent act of kiting money.

Kiting can be described as an illegal means of obtaining unauthorized bank credit or avoiding debts involving fraudulent activity like issuing false financial instruments like a check kiting, a cheque amount more than a bank balance, etc. In addition, it may include using two or more bank accounts whereby one negotiable instrument is written in favor of another and creating a virtual bank balance to honor payments outstanding in another bank account.

It is not only involved in bank financial instruments but also in the securities market. In the case of the securities market, if a broker fails to honor its commitment and delinquently does not complete the transaction, it leads to the fraudulent act of kiting.

1. Forgery in the cheque.
2. Cheque issued without sufficient bank balance balance in case of kiting in banking.
3. Drawing of a cheque for generating a false bank balance etc.

Although it is very hard for a financial institution to determine such a scam, one must closely monitor transactions after identifying any suspected kiter. Below mentioned are some of the checks and mechanisms that one can implement for detecting kiting scams: -

1. Alert Management: There should be a robust mechanism for identifying any person suspecting kiting cash.
2. Once identifying suspects, one should closely monitor their transactions to detect and prevent any suspected fraudulent transactions.
3. Banks/ FI should contact and inquire with other banks/ FI regarding types of transactions carried out by suspected kiter and ensure whether funds are available or not to the other institution involved to confirm the funds are available within accounts maintained by suspectable kiter at their bank.
4. Never charge off any person involved in kiting money until facts are wholly confirmed.

• The consequences of check-kiting may be minor or severe, depending upon the size of the bank/ FI and the level of fraud. If the money involved is recovered, the bank may not suspend the kiter’s account. Still, it may deprive customers of privileges like drawing/ depositing personal checks or processing ATM transactions.
• While in some cases, the bank/ FI can decide to suspend the account and report the fraudulent act of checking the kiter to the agency for checking accounts. Suppose an agency has a bad report of a kiter. In that case, they may not open additional savings/ current accounts. It may become difficult to carry out routine transactions like staff salary processing, goods purchasing, etc. While in case of kiting cash, they can also be criminally charged and locked in prison.

• Depending upon the value of the kited transaction, penalties that one may impose may vary. For example, when a kiter commits a minor kiting activity where money also gets subsequently recovered by banks/ FI, they may deprive them of some of the rights and privileges associated with the accounts.
• While in some cases where money may not get recovered, banks may use other ways or means to recover the defaulted amount. Along with recovery, a person may also be charged with certain monetary (involving cash penalties or non-monetary penalties), including suspension of accounts maintained.
• Further, banks/ FI may report to ChexSystems, a credit rating agency. Suppose this agency already contains bad reports about the kiter. In that case, it may impose restrictions on opening up savings or accounts in the future for a particular period or forever, depending on the fraud involved.

To prevent such scams, you should monitor the following: -

• Depositing and withdrawing activity to conceal actual negative balances.
• Total dollar debits and credits are the same.
• The large cheque is drawn on the same bank/payee.
• Overdrafts are getting cleared with checks instead of cash.
• Common inquiries regarding account balances.
• Regular use of different bank branches.
• Frequent use of ATMs.

This article is a Guide to Kiting and its meaning. We explain it with example, penalty, how it works, types, detection, its consequence & how to prevent it. You may learn more about financing from the following articles: -

• Ponzi Scheme
• Fraud Triangle
• Tax Fraud
• Pyramid Scheme