Kiting

Kiting: Fraudulent Checks and Securities Explained

Key takeaways
* Kiting is a fraud that exploits timing gaps in financial instruments (checks or securities) to obtain unauthorized credit.
* Check kiting uses checks drawn on accounts with insufficient funds and relies on float time to cover withdrawals.
* Retail kiting uses bad checks and retailer cash-back to obtain goods or cash before checks clear.
* Securities kiting involves failing to settle trades within required timeframes, violating regulations and creating artificial positions.

What is kiting?
Kiting is the deliberate manipulation of payment or settlement timing to create the appearance of funds or valid positions that do not exist. Perpetrators exploit the delay between when a payment instrument is presented and when the funds are actually transferred (the float) to make withdrawals or complete transactions fraudulently.

Check kiting: how it works
* The kiter writes a check from Account A (which lacks sufficient funds) and deposits it into Account B.
* Before that check clears, they withdraw funds from Account B or write another check from Account B back to Account A.
* By repeatedly shuffling checks between accounts and staying one step ahead of clearing, the kiter creates temporary, unauthorized credit and makes fraudulent withdrawals or purchases.
* Faster check-clearing systems, bank holds on deposits, and fees for returned checks have reduced the prevalence of traditional check kiting.

Retail kiting
* Retail kiting is a variation that uses retailers as intermediaries.
* A bad check (check #1) is cashed or used to purchase goods at a retailer. Before it clears, the kiter writes another check (check #2), which may include or be entirely for cash-back, and deposits that cash to cover check #1.
* Repeating this cycle can produce a steady flow of goods and cash ahead of clearance.
* Although cashback is more commonly linked to debit cards now, some retailers still offer check cashback, enabling this scheme.

Securities kiting and settlement violations
* Securities kiting arises when firms mishandle the timely delivery and receipt of securities trades.
* Regulatory settlement windows (commonly a three-business-day cycle) require buy-and-sell transactions to be completed within a set period.
* If a firm does not receive securities on time, a buy-in on the open market may be required; failure to buy in or to deliver securities while maintaining artificial short positions can constitute kiting and violate securities regulations.

Detection and prevention
* Financial institutions use several controls to reduce kiting risk:
– Reduced float times and faster clearing systems.
– Holds on deposited funds until verification.
– Monitoring for unusual check-swapping patterns and rapid inter-account transfers.
– Returned-check fees and automated fraud-detection algorithms.
* Businesses and individuals can protect themselves by:
– Reconciling accounts frequently and verifying large or unusual deposits.
– Accepting verified electronic payments when possible.
– Implementing deposit verification procedures and limiting acceptance of checks for cashback.
– Reporting suspected fraud promptly to the bank and authorities.

Legal consequences
Kiting is illegal. Perpetrators may face criminal prosecution, civil liability, restitution requirements, and banking sanctions. Firms that violate securities settlement rules can face regulatory fines and operational penalties.

Bottom line
Kiting involves manipulating timing differences in payments or settlements to create unauthorized credit. While improvements in clearing and verification have reduced classic check kiting, variations—especially those exploiting retailers or settlement rules—remain a serious fraud risk. Awareness, stronger controls, and timely account management are essential to prevent and detect kiting.