What Is Kiting?
Let me explain kiting to you directly: it's a fraudulent scheme where someone uses financial instruments like checks to get unauthorized credit. You target banks or retailers by exploiting the time it takes for transactions to process, allowing illegal withdrawals.
Key Takeaways
- Kiting is fraud that uses checks or securities to gain unauthorized credit.
- Check kiting means writing checks between accounts without enough funds, depending on processing delays.
- Retail kiting involves bad checks at stores to buy goods while juggling clearing times for profit.
- Securities kiting happens when firms ignore SEC rules on trade settlements, breaking regulations.
How Check Kiting Exploits Bank Systems
In the banking world, check kiting happens when you pass checks between two or more banks using accounts that don't have sufficient funds. You rely on the float time—the delay before a check clears from one bank to another. For instance, you write a check from the first bank against an account at the second.
Before that check bounces, you withdraw the money from the second account and deposit it back into the first. You might repeat this back and forth, sometimes over and over. The end game is a chain of fraudulent withdrawals that stay one step ahead of the bad checks clearing.
Shorter clearing times for checks have cut down on this kind of kiting in banks. Practices like holds on deposits and fees for bounced checks also help prevent it.
Understanding Retail Kiting and Its Implications
There's a twist called retail kiting. You cash a bad check—let's call it check one—at a store to buy something. Before it clears, you write check two, which might include cashback or be all cashback. Some stores still allow cashback on checks, even if it's more common with debit cards now.
You take the cash from check two and deposit it to cover check one. Then you repeat the fraud to cover check two, keeping it going to grab items and cash while outrunning the float. It's all about staying ahead to fraudulently build up gains.
Securities Kiting and Regulatory Risks
When it comes to securities, kiting means firms misrepresent things by ignoring SEC rules on settling buy-and-sell trades within three days. If a firm doesn't get securities on time, it has to buy the shortfall on the open market and charge the late firm fees.
The late firm is kiting if it skips buying on the market, holds a short position, delays delivery, or does trades that mess with proper settlements. It's straight-up fraud under regulations.
The Bottom Line
At its core, kiting is about manipulating checks or securities on purpose to scam unauthorized credit. This covers writing bad checks or faking securities to dodge SEC rules. Banking tech has lowered check kiting cases, but misusing financial tools is still a big issue. Knowing how kiting works lets you and institutions guard against fraud and stick to regulations.
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