What is Kiting?
Kiting can be defined as an illegal method of obtaining unauthorised credits in his/ her bank a/c by using fraudulent means like issuing a negotiable financial instrument without having sufficient bank balance or mentioning false amount, date or by misrepresenting already availed credit finance so as to obtain more funds.
Kiting can be described as an illegal means of obtaining unauthorized bank credit or avoiding debts involving a fraudulent activity like issuing false financial instruments like false cheque, cheque amount more than bank balance, etc. It may involve the use of two or more bank account whereby one negotiable instrumentNegotiable InstrumentA negotiable instrument refers to the transferrable and signed written document whereby the payer guarantees or promises to pay a certain sum on a specific future date or as on-demand to the payee or bearer. It includes bills of exchange, delivery order, promissory note, customer receipt, etc. is written in favor of another and creating virtual bank balance to honor payments outstanding in another bank a/c.
It is not only involved in bank financial instruments but also in the securities market. In the case of the securities market, if a broker fails to honor its commitment and delinquently does not completes the transaction, it leads to the fraudulent act of kiting.
How Does Kiting Work?
- It may involve writing cheques with insufficient bank balance or also, a person having two banks a/c may write a cheque on one bank in favor of the second bank for clearing its dues and so as to clear balance in the first bank, he writes a cheque in favor of the first bank on the second day creating virtual bank balance.
- This process continues until the person gets caught. It is not only involved in banking financial instruments but can also be done on securities. When any securities firm does not honor the settlement of the buying-selling transaction or floats with timelines issued by regulatory authorities i.e. three days settlement period.
- In case a firm fails to receive securities within the settlement period, it needs to buy from open market for netting off the transaction. In the case where such firms knowingly fail to buy short securities, it will be considered as a delinquent act of kiting.
Examples of Kiting
- Forgery in the cheque.
- Cheque issued without sufficient bank balance.
- Drawing of a cheque for generating false bank balance etc.
How to Prevent Check Kiting Scams?
To prevent such scams, you should monitor the following –
- Depositing and withdrawing activity to conceals actual negative balances.
- Total dollar debits and credits are the same.
- The large cheque is drawn on the same bank/payee.
- Overdrafts are getting cleared with checks instead of cash.
- Regular enquires regarding account balances.
- Regular use of different bank branches.
- Frequent use of ATMs.
Consequences of Check Kiting
- The consequences of check-kiting may be minor or severe, depending upon the size of bank/ FI and level of fraud. In a case where the money involved gets recovered – Bank may not suspend the Kiter’s a/c but may deprive the customer of some privileges like drawing/ depositing personal checks or process ATM transactions.
- While in some cases, the bank/ FI can decide to suspend the account and also report the fraudulent act of check Kiter to the agency for checking accounts. If an agency has a bad report of Kiter, they may not be in a position to open additional savings/ current accounts due to which it may become difficult to carry out routine transactions like staff salary processing, goods purchasing, etc. While in case of severe fraud, they can also be criminally charged and can be locked under the prison.
Check Kiting Detection
Although it is very hard for a financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. to determine such a scam. One needs to monitor transactions after identifying any suspected kiter closely. Below mentioned are some of the checks and mechanisms which can be implemented for detecting kiting scams:
- Alert Management: There should be a robust mechanism for identifying any person suspectable to kiting.
- Once after Identifying suspects, their transactions should be closely monitored to detect and prevent any suspectable fraudulent transaction.
- Banks/ FI should contact and enquire with other banks/ FI regarding types of transactions carried out by suspected kiter and also ensure whether funds are available or not the other institution involved to confirm the funds are available within accounts maintained by suspectable kiter at their bank.
- Never charge off any person as involved in kiting until facts are wholly confirmed.
Penalties for Kiting
- Depending upon the value of the kited transaction, penalties that may be imposed may vary. For example, when a kiter commits a minor kiting activity where money also gets subsequently recovered by banks/ FI then, they may deprive them of some of the rights and privileges associated with the accounts.
- While in some cases where money may not get recovered, banks may use some other ways or means to recover the defaulted amount. Along with recovery, a person may also be charged with certain monetary (involving cash penalties or non-monetary penalties, which may include suspension of accounts maintained.
- Further, banks/ FI may report to ChexSystems, which is a credit rating agency. If this agency already contains bad reports about the kiter, it may impose restrictions on opening up of savings or current accounts in the future for a particular period or forever, depending on fraud involved.
Kiting can be defined as a criminal act of misusing banking financial instruments for obtaining unauthorized credits in bank a/c or for avoiding a particular debit impact. This may involve a check, securities, and retail kiting. There are certain checks and monitoring mechanisms that need to be implemented for identifying and preventing a kiting transaction. Consequences and penalties vary on the nature and value of such transactions undertaken by the offender. It also mainly affects the stems of banking/ financing industries.
This has been a guide to Kiting and its meaning. Here we discuss types, examples, and how to prevent check-kiting scams along with their consequences and penalties. You may learn more about financing from the following articles-