Kiting

Updated on April 29, 2024
Article byPranjal Jain
Reviewed byDheeraj Vaidya, CFA, FRM

Kiting Meaning

Kiting is an illegal method of obtaining unauthorized credits in their bank account by using fraudulent means like issuing a negotiable financial instrument without sufficient bank balance, mentioning a false amount or date, or misrepresenting already availed credit finance to obtain more funds.

Kiting Meaning

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It may involve a check, securities, and retail kiting. Certain checks and monitoring mechanisms need to be implemented to identify and prevent 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.

Key Takeaways

  • Kiting is an illegal approach to obtaining unauthorized credits in their bank account. It utilizes fraudulent measures like issuing a negotiable financial instrument with an insufficient bank balance, indicating a false amount or date, or misrepresenting already availed credit finance to get more funds.
  • Kiting is the criminal act of misusing banking financial instruments to obtain unauthorized credits or to avoid a specific debit impact. 
  • Certain checks and monitoring mechanisms must be implemented to detect and prevent kiting transactions.

How Does Check Kiting Work?

Kiting can be defined as a criminal act of misusing banking financial instruments to obtain unauthorized credits in bank a/c or to avoid a particular debit impact.

Check kiting may involve writing cheques with an insufficient bank balance, or a person with two bank accounts may write a cheque on one bank in favor of the second bank for clearing its dues and bank balance in the first bank. Then, he writes a cheque in favor of the first bank on the second day, creating a virtual bank balance. This process continues until the person gets caught.

Kiting in banking involves in banking financial instruments and 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.

If a firm fails to receive securities within the settlement period, it must buy from the open market to net off the transaction. If such firms knowingly fail to buy short securities, it will be considered a delinquent act of kiting money.

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Example

Kiting can be described as an illegal means of obtaining unauthorized bank creditBank CreditBank credit is usually referred to as a loan given for business requirements or personal needs to its customers, with or without a guarantee or collateral, with an expectation of earning periodic interest on the loan amount. The principal amount is refunded at the end of loan tenure, duly agreed upon, and mentioned in the loan covenant.read more or avoiding debts involving fraudulent activity like issuing false financial instrumentsFinancial InstrumentsFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more like a check kiting, a cheque amount more than a bank balance, etc. In addition, it may include using two or more bank accounts 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.read more is written in favor of another and creating a virtual bank balance to honor payments outstanding in another bank account.

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 complete the transaction, it leads to the fraudulent act of kiting.

Demo-bank-Kiting Example

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Types

Kiting

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  1. Forgery in the cheque.
  2. Cheque issued without sufficient bank balance balance in case of kiting in banking.
  3. Drawing of a cheque for generating a false bank balance etc.

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. read more to determine such a scam, one must closely monitor transactions after identifying any suspected kiter. Below mentioned are some of the checks and mechanisms that one can implement for detecting kiting scams: –

  1. Alert Management: There should be a robust mechanism for identifying any person suspecting kiting cash.
  2. Once identifying suspects, one should closely monitor their transactions to detect and prevent any suspected fraudulent transactions.
  3. Banks/ FI should contact and inquire with other banks/ FI regarding types of transactions carried out by suspected kiter and ensure whether funds are available or not to the other institution involved to confirm the funds are available within accounts maintained by suspectable kiter at their bank.
  4. Never charge off any person involved in kiting money until facts are wholly confirmed.

Consequences

  • The consequences of check-kiting may be minor or severe, depending upon the size of the bank/ FI and the level of fraud. If the money involved is recovered, the bank may not suspend the kiter’s account. Still, it may deprive customers of privileges like drawing/ depositing personal checks or processing ATM transactions.
  • While in some cases, the bank/ FI can decide to suspend the account and report the fraudulent act of checking the kiter to the agency for checking accounts. Suppose an agency has a bad report of a kiter. In that case, they may not open additional savings/ current accounts. It may become difficult to carry out routine transactions like staff salary processing, goods purchasing, etc. While in case of kiting cash, they can also be criminally charged and locked in prison.

Penalties

  • Depending upon the value of the kited transaction, penalties that one may impose may vary. For example, when a kiter commits a minor kiting activity where money also gets subsequently recovered by banks/ FI, 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 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), including suspension of accounts maintained.
  • Further, banks/ FI may report to ChexSystems, a credit rating agency. Suppose this agency already contains bad reports about the kiter. In that case, it may impose restrictions on opening up savings or accounts in the future for a particular period or forever, depending on the fraud involved.

How To Prevent?

To prevent such scams, you should monitor the following: –

Frequently Asked Questions (FAQs)

What is the penalty for check-kiting?

Kiting is a severe crime. Therefore, first-time offenders can face stiff penalties, including fines of $500,000 or more than 20 years.

What is kiting in banking?

Kiting or check-kiting covers a lousy check from one bank account to another. One with multiple bank accounts may utilize this benefit as it requires multiple days to process checks. In addition, the deposited check increases the fund available. However, kiting is illegal.

Do banks prosecute check-kiting?

In the United States, check kiting is summoned under Title 18, U.S. Code Section 1344, defined as receiving the funds of a Federal bank under pretenses. A check kite obtains an interest-free loan from a bank without the bank’s awareness.

What is credit card kiting?

Credit card kiting is using one or more credit cards to obtain cash and purchasing power they do not have or the payment of credit card balances with the profit from the other card. It is distinct from check-kiting and, in almost all cases, illegal. Laws against credit card kiting are somewhat restrictive of the practice, thereby allowing it to some degree. It is up to the banks to detect the method, which can be stopped if necessary.

Recommended Articles

This article is a Guide to Kiting and its meaning. We explain it with example, penalty, how it works, types, detection, its consequence & how to prevent it. You may learn more about financing from the following articles: –