Thursday, January 14, 2016

Check Kiting -- a Primer

Check kiting is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in a checking or other bank account. In this way, instead of being used as a negotiable instrument, checks are misused as a form of unauthorized credit.

Kiting is commonly defined as intentionally writing a check for a value greater than the account balance from an account in one bank, then writing a check from another account in another bank, also with non-sufficient funds, with the second check serving to cover the non-existent funds from the first account.  The purpose of check kiting is to falsely inflate the balance of a checking account in order to allow written checks, that would otherwise bounce, to clear.  If the account is not planned to be replenished, then the fraud is colloquially known as paper hanging.  If writing a check with insufficient funds is done with the expectation they will be covered by payday – in effect a payday loan – it is called playing the float.

Some forms of check fraud involve the use of a second bank or a third party, often a place of retail, in order to delay the absence of funds in a transactional account on the day the check is due to clear at the bank. Such acts are frequently committed by bankrupt or temporarily unemployed individuals or small businesses seeking emergency loans, by start-up businesses or other struggling businesses seeking interest-free financing while intending to make good on their balances, or by pathological gamblers who have the expectation of depositing funds upon winning. It has also been used by those who have some genuine funds in interest-bearing accounts, but who artificially inflate their balances in order to increase the interest paid by their banks.

Corporate Kiting

Corporate kiting involves the use of a large kiting scheme involving perhaps millions of dollars to secretly borrow money or earn interest. While limits are often placed on an individual as to how much money can be deposited without a temporary hold, corporations may be granted immediate access to funds, which can make the scheme go unnoticed. This was the case with E. F. Hutton & Co. in the early 1980s.

Legal Implications of Check Kiting

Check kiting is illegal in many countries.  However, a majority of countries do not have a float system and checks are not paid until they are cleared, so check kiting is impossible.

Kiting in the United States

According to the United States Department of Justice, check kiting can be prosecuted under several existing laws including those against bank fraud (18 U.S.C. § 1344), misapplication (18 U.S.C. § 656), or required entries (18 U.S.C. § 1005). It can draw a fine of up to $1,000,000.00, imprisonment for up to 30 years, or both, and many first-time offenders with no criminal background have received stiff sentences. In addition to the federal penalties, state law often provides for alternate civil and criminal consequences.

Although the United States prosecutes some paper hangers under federal law, most issuance of bad checks in the United States is prosecuted as a state offense.

Laws vary from state to state, but one example is Ohio Revised Code 2913.11(2)(B), which states: "No person, with purpose to defraud, shall issue or transfer or cause to be issued or transferred a check or other negotiable instrument, knowing that it will be dishonored or knowing that a person has ordered or will order stop payment on the check or other negotiable instrument". Ordinarily, passing a bad check in Ohio is a misdemeanor, but large checks or multiple checks within a six-month period aggregating to large amounts make it a 5th-, 4th-, or 3rd-degree felony, depending on the amounts involved.

Some states protect the careless by making the intent to defraud an element of the crime, or exempting from punishment those that pay the check at a later date. For example, Indiana's check deception statute states that it is a defense if the person issuing the check "pays the payee or holder the amount due, together with protest fees and any service fee or charge, ... within ten (10) days after the date of mailing by the payee or holder of notice to the person that the check, draft, or order has not been paid by the credit institution." Furthermore, it is not a crime if "the payee or holder knows that the person has insufficient funds to ensure payment or that the check, draft, or order is postdated", or "insufficiency of funds or credit results from an adjustment to the person's account by the credit institution without notice to the person."

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