Check-Kiting: How To See the Warning Signs
Having insufficient funds in a checking account can result in situations like checks bouncing and check-kiting. A bounced check can’t be processed because the account holder doesn’t have enough money in the checking account available for payment.
Check-kiting adds the element of fraudulent misrepresentation of writing bad checks to increase a financial position at more than one bank or fraudulently depositing those funds into another account. Keep reading to learn how to avoid this form of check fraud.
What Is Check-Kiting and How Does It Work?
There is no way around the fact that check-kiting is a crime. Here is a breakdown of what this scheme involves.
- You write a check from a bank account that has insufficient funds.
- You deposit that check into a second bank account.
- You write a check from that second bank account and deposit it in the original one to cover the first check.
Check-kiting takes advantage of the check float, or the time it takes for banks to clear checks. The multiple check writing and depositing makes it appear that the money is in the two accounts and helps the person committing fraud to obtain an illegal, interest-free loan.
Signs of Check-Kiting
Here are common signs or unusual activities indicating signs of check-kiting.
|Activity||Why It Could Be Check-Kiting|
|ATMs||Frequently making deposits|
|Deposits||Several per day|
|Bank branches||Frequently using different ones|
|Account balances||Frequent inquiries|
|Withdrawals||More frequent than deposits|
|Overdrafts||Covered with checks and not cash|
|Deposits and checks||Many deposits drawn from the same bank; many checks made payable to the same person|
Types of Check-Kiting
Here are different types of check-kiting schemes so you can recognize the warning signs and avoid them in the future.
1. Circular Check-Kiting
- Using multiple accounts at different banks.
- Using one or more account holders’ names or a group of account holders.
- Writing and depositing checks of increasing value from one account to another, appearing to have sufficient funds.
2. Corporate Check-Kiting
- Involving millions of dollars to borrow funds or earn interest in secret.
- Usually carried out by corporations without too many limits on their bank deposits.
3. Endless Check-Kiting
- Using the name, logo and address of one bank and the routing number of a different bank.
- Causes a potentially endless cycle of check returning from bank to bank.
4. Retail-Based Check-Kiting
- Involving an entity other than a bank to unknowingly offer funds temporarily to an account holder.
- Example: Writing a check at a store for more than the purchase price to get cash back without sufficient funds in the account to cover the amount of the purchase.
Consequences of Check-Kiting
This crime involves writing and cashing checks for non-sufficient funds from any financial institution. It typically takes three days for banks to clear checks. A scammer can even earn nonexistent interest on money that is processed this way if they do it repeatedly over time and with serious thought.
It is also a type of federal or state bank fraud punishable by penal codes. It is considered a white-collar crime and carries some serious legal penalties potentially including:
- $500,000 fines for first-time offenders.
- 20 years in prison.
- Banks may also impose civil charges as legal action to recoup their losses.
- Penalties are even steeper for large corporations found guilty of this fraud.
How To Avoid Becoming a Victim of Check-Kiting
Banks are not exclusively prone to check-kiting scams. Individuals can also fall prey to such fraud. To avoid having this happen to you, consider the following advice:
- Restrict access to your checks to one person or only to certain people.
- Only accept checks for the exact amount of money owed to you.
- Investigate out-of-sequence cleared checks.
- Only refund overpayment after checks have cleared.
Not everyone who writes a check with insufficient funds in the bank and hurries to try to cover the check is taking part in check-kiting. It becomes a criminal act when it is intentional with the expectation of using trickery, deceit, swindling or deception to gain something of value.
FAQHere are the answers to some of the most frequently asked questions regarding check-kiting.
- What is an example of check-kiting?
- There are multiple examples of check-kiting including circular, corporate, endless or retail-based.
- Is check-kiting illegal?
- Check-kiting is illegal. Scammers are usually skilled in knowing the check-clearing process and take advantage of that knowledge by timing check deposits and withdrawals before banks catch on. These schemes can result in millions of dollars in bank losses.
- Do banks prosecute check-kiting?
- Yes, banks may also impose civil charges as legal action to recoup their losses.
Caitlyn Moorhead contributed to the reporting for this article.
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- Greg Hill & Associates. "What Is Check Kiting? The Defenses? The Punishment?"
- Collateral Base. "How To Stop Check Kiting Scams."