What is 'Kiting'

Kiting is the fraudulent useĀ of a financial instrument such as a check to obtain additional credit that is not authorized. There are two variants of kiting:

  • The act of misrepresenting the value of a financial instrument for the purpose of extending credit obligations or increasing financial leverage.
  • A fraudulent act involving the alteration or issuance of a check or draft with insufficient funds.

BREAKING DOWN 'Kiting'

Kiting generally occurs when securities firms fail to deliver securities of buy and sell transactions in a timely manner (before the three-day settlement period). The firm failing to receive the securities is required to purchase the shortage on the open market and charge the delinquent firm any associated fees. The delinquent firm is practicing the fraudulent act of kiting if it fails to purchase the securities on the open market and maintains a short position, delays delivery or takes part in transactions contrary to SEC regulations regarding the proper settlement of trades.

In the past, clearing checks between banks took extended periods of time. Individuals used to take advantage of this delay and wrote "bad" checks to deposit funds before the checks were cashed. Banks have tried to cut down on kited checks by placing holds on deposited funds and charging for returned checks.

Both of these kiting practices are illegal.

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