What Is Check Kiting?
Check kiting is a form of bank fraud that exploits the float time between when a check is deposited and when funds are actually collected. The scheme involves writing checks between two or more bank accounts, artificially inflating the balance in each account before the banks can verify that the funds actually exist. Check kiting is a federal crime under 18 U.S.C. § 1344 and can result in substantial fines and imprisonment.
At Howard East, we help businesses implement controls to detect and prevent check kiting, and we represent companies that have been victimized by this type of fraud in recovery actions.
How Check Kiting Works
In a basic check kiting scheme, the perpetrator writes a check from Account A (which has insufficient funds) and deposits it into Account B. Before the check from Account A clears, they write a check from Account B back to Account A, creating the appearance of sufficient funds in both accounts. This cycle repeats, with increasingly larger amounts, until the scheme collapses or is detected.
Modern variations include electronic kiting using ACH transfers, remote deposit capture fraud, and corporate kiting schemes that exploit the longer clearing times associated with business accounts and wire transfers.
Warning Signs
Common indicators of check kiting include frequent transfers between accounts at different banks, check deposits that are consistently close to the exact amount needed to cover outgoing payments, unusually high volumes of inter-account transactions, and a pattern of deposits made just before or just after other checks clear.
Impact on Businesses
Businesses can be check kiting victims in several ways. Vendors may accept kited checks as payment for goods or services, only to have the checks bounce after the goods are delivered. Businesses may unknowingly participate in kiting schemes when employees manipulate company accounts. And banks may hold businesses liable for kited deposits under the UCC’s warranty provisions.
The financial impact extends beyond the face value of the bad checks. Businesses face bank fees, lost inventory, disrupted operations, and the cost of pursuing legal remedies against the perpetrators.
Prevention Strategies
Effective prevention requires both procedural controls and technology. Implement positive pay systems with your bank, which match presented checks against a list of checks you have actually issued. Separate check-writing authority from bank reconciliation duties. Conduct frequent bank reconciliations — weekly at minimum for high-volume accounts. Monitor inter-account transfers for unusual patterns.
For businesses that accept checks from customers, consider requiring certified or cashier’s checks for large transactions, implementing hold periods on new customer deposits, and using check verification services before accepting payment.
Legal Remedies for Victims
If your business has been victimized by check kiting, several legal remedies are available. Civil fraud claims allow you to pursue actual damages, and in many states, treble damages for certain types of check fraud. Criminal referrals to federal prosecutors or state attorneys general can result in prosecution. You may also have claims against banks that failed to exercise ordinary care in detecting the scheme.
Get Help with Check Fraud Prevention
Whether you need to strengthen your internal controls or pursue recovery against a check kiting perpetrator, our attorneys provide practical counsel grounded in commercial reality.
Protect your business from fraud. Contact Howard East or call 833-952-3111.
This content provides general information about check kiting and fraud prevention. It does not constitute legal advice. Consult a qualified attorney for guidance on your specific situation.
How Check Kiting Affects Small Businesses
Check kiting schemes pose serious risks to small businesses that accept checks as payment or rely on check float for cash management. When a check kiting scheme collapses, businesses holding worthless checks face immediate losses that banks typically refuse to cover. These schemes can also expose innocent businesses to criminal investigation if their accounts were unknowingly used in the scheme. Companies should implement robust check verification procedures and consider electronic payment alternatives to reduce fraud exposure.
Banks increasingly use automated systems to detect fraudulent deposit patterns, including monitoring for circular deposits between related accounts, unusual deposit-to-withdrawal ratios, and repeated large deposits immediately followed by withdrawals. Understanding how banks identify these schemes helps business owners recognize warning signs in their own transactions and customer payment patterns.
Frequently Asked Questions About Check Kiting
What is check kiting and how does it work?
Check kiting is a fraud scheme that exploits the float time between depositing a check and the bank collecting funds. The perpetrator writes checks between multiple accounts, creating the illusion of funds in each account. Check kiting is a federal crime that can result in fines up to $1 million and up to 30 years imprisonment.
How can businesses protect themselves from check kiting?
Businesses can protect against check kiting by implementing check hold policies, using positive pay systems through their bank, verifying large checks before releasing goods or services, monitoring accounts for unusual activity, and transitioning to electronic payment methods that settle faster than paper checks.
What are the penalties for check kiting?
Federal penalties for this offense under federal law include fines up to $1 million and imprisonment up to 30 years per count. State charges may also apply. Civil liability for the full amount of fraudulent transactions is common, and perpetrators often face restitution orders requiring repayment of all losses caused by the fraudulent scheme.
