What Is Kiting?
Kiting is the fraudulent use of a financial instrument to obtain additional credit that is not authorized. Kiting encompasses two main types of fraud:
- Kiting involves the illegal use of financial instruments to fraudulently obtain additional credit
- Securities firms "kite" if they fail to follow SEC rules around obtaining securities in a timely way
- Check kiting targets banks or retailers through a series of bad checks, sometimes drawn on multiple accounts
Check Kiting Involving Banks
Carried out within the banking system, kiting typically involves passing a series of checks at two or more banking institutions, using accounts that have insufficient funds. Relying on the float time required for a check deposited at one bank to clear at another, the kiter typically writes a check at the first bank against an account at the other.
Before that check clears, he or she then withdraws the funds from the second bank account and deposits the funds back into the first. The process may then be repeated in the opposite order, sometimes repeatedly. The net result is a series of fraudulent withdrawals that rely on being a step ahead of the fraudulent check on which they are based having cleared.
Reduced times for checks to clear has helped reduce the incidence of check kiting involving banks, as have such practices as banks placing holds on deposited funds and charging for returned checks.
A variant of check kiting is known as "retail kiting." This relies on cashing a bad check (number one) at a retailer to purchase an item. Then, before that check has cleared, the kiter writes another check (number two), which may include (or entirely comprise) a cashback payment. While cashback is now most often associated with debit cards, some retailers still offer this convenience with checks.
The cash from check number two is then deposited into the account, to allow check number one to clear. The fraud is then repeated in order to cover check number two and may be sustained in order to stay ahead of the float and fraudulently obtain a series of items and cash withdrawals.
Kiting With Securities
Kiting that involves misrepresenting securities generally occurs when securities firms flout SEC regulations regarding the timely delivery of buy-and-sell transactions, which must be completed within a three-day settlement period. If a firm fails to receive the securities within that timeframe, it is required to purchase the shortage on the open market and charge the delinquent firm for any associated fees.
The delinquent firm is considered to be 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 the proper settlement of trades.