Kiting refers to the illegal use of financial instruments to obtain unauthorized credit. This fraudulent practice primarily manifests in two forms: check kiting and securities kiting. Both methods exploit the float time and regulations surrounding financial transactions to deceive banks, retailers, and other institutions.
What is Kiting?
Kiting can be generally described as an act of deception that allows individuals or entities to manipulate their financial status to gain additional credit or funds. This practice is considered fraudulent because it involves the misrepresentation of funds – essentially borrowing money that one does not possess.
Key Takeaways
- Kiting is characterized by the illegal utilization of financial instruments.
- It can manifest through altered or insufficiently funded checks and misrepresentation of financial instrument values.
- Financial institutions, such as banks and securities firms, are common targets or perpetrators of kiting schemes.
Check Kiting Explained
How Check Kiting Works
Check kiting typically occurs within the banking system and involves a series of transactions across multiple financial institutions. Here’s how it generally unfolds:
- Writing Bad Checks: The kiter opens accounts in multiple banks and writes a check from one account that has insufficient funds.
- Deposit and Withdrawal: They deposit this check in a different bank (Bank B) where they have an account and quickly withdraw the funds, relying on the delay in check processing times.
- Reversing the Process: The kiter may write another check from the account at Bank B to deposit back into the account at Bank A, all before the first check clears.
- Repetition: This process can be repeated several times, with the kiter attempting to stay one step ahead of the checks they write.
Impact of Technology
The advent of advanced technology and quicker electronic fund transfers has significantly reduced the frequency of check kiting involving banks. Measures such as placing holds on deposited checks and charging fees for bounced checks have further mitigated the risk of this type of fraud.
Retail Kiting: A Close Variant
A specific form of check kiting known as retail kiting involves cashing bad checks at retail establishments. The process is similar to traditional check kiting but includes the purchase of goods:
- Cash Transaction: The kiter presents a check (check one) to a retailer, cashing it to buy products.
- Cashback Manipulation: Before the check clears, they write a second check (check two) that may involve cash back.
- Covering the Checks: They deposit the cash received from check two to ensure check one clears, perpetuating the cycle to acquire additional items or cash.
Kiting with Securities
Securities kiting represents a different but equally misleading practice, primarily in the context of securities firms. This occurs when firms fail to follow SEC regulations regarding the timely execution of transactions. The specifics include:
- Settlement Timeframes: The SEC mandates that transactions should be settled within three days. If securities are not received in that timeframe, firms must purchase the securities from the open market.
- Fraudulent Practices: A firm engages in kiting if it fails to process these transactions properly. This may involve not buying the required securities, maintaining short positions, or delaying trades.
Conclusion
Kiting is a multifaceted fraudulent practice that undermines the integrity of financial systems. both check kiting and securities kiting involve deceptive maneuvers that can have serious implications for all parties involved, including financial institutions, retailers, and the perpetrators themselves. Understanding kiting and its mechanisms is crucial for preventing fraud and maintaining financial stability.
Legal Repercussions
Engaging in kiting can lead to criminal charges, including fraud, forgery, and theft, resulting in severe penalties, including fines and imprisonment. Institutions are continually enhancing their procedures to detect and prevent kiting, making it a high-risk fraudulent strategy for potential perpetrators.
In summary, with ongoing advancements in technology and stringent regulations, the likelihood of successfully executing a kiting scheme is greatly diminished, although awareness and vigilance remain critical in the financial sector.