Check kiting: detection, prosecution and prevention

FBI Law Enforcement Bulletin,The,  Nov, 1993  by Johnny S. Turner,  W. Steve Albrecht

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Dennis Greer (not his real name) was struggling financially. After using a $1,000 inheritance to secure an unfurnished apartment, he supported himself with a minimum-wage job that barely covered his living expenses.

With no family members or friends to turn to for assistance, and instead of seeking help through legal channels, Greet committed a fraud known as check kiting. That is, he wrote checks on one bank when there were insufficient funds in his account to cover them. To conceal the fraud, he made deposits using checks drawn on a second bank, where he maintained an account but had no money in it. The last bank to catch the fraud lost over $40,000 in less than 2 months. Greer's kite was small compared to other kiting schemes. For example, in 1988, two individuals in New York City kited between two prominent banks. Their kite involved 15,000 checks totaling $2 billion. In another case, almost 20 banks lost over $2 million, while the perpetrator's "friends" lost $19 million.

Difficult to detect and prosecute, check kiting schemes have gained popularity in recent years. In response, more banks locus on recognizing the signs of kiting. As a result, check kiting schemes are being discovered and reported more frequently today than ever before. In fact, the number of cases reported to the FBI's Financial Institution Fraud Unit at FBI Headquarters in Washington, DC, has doubled in the past 4 years.

In order to prosecute these cases successfully, the FBI developed the Check Kite Analysis System (CKAS),(1) a computer program that helps law enforcement agencies to reduce the complexity of investigating kiting schemes and to prove the perpetrator's intent to defraud. This article defines check kiting, describes detection methods, and explains how the FBI uses the CKAS to prosecute kiters successfully. Finally, it advises how financial institutions can stop kiting schemes before they start.

Check Kiting Defined

Check kiting is a systematic pattern of depositing nonsufficient funds (NSF) checks between two or more banks, resulting in the books and records of those banks showing inflated balances that permit these NSF checks to be honored rather than returned unpaid. In addition, other checks and withdrawals may be honored against these inflated balances, resulting in actual negative balances, to the extent that banks allow withdrawal of uncollected funds. Put simply, check kiting is accomplished by taking advantage of the float--that is, the time required for a check deposited in one bank to be physically presented for payment at the bank on which it was drawn.

Check kiting goes beyond check swapping, which involves merely exchanging checks between two or more bank accounts. When individuals devise check swapping schemes in order to create bragging rights to large account balances, they usually need not fear prosecution because the potential loss from one bank is offset by a matching inflated balance in another. Upon discovery, cooperating banks resolve the problem by returning the checks unpaid and eliminating artificially inflated balances among themselves. However, when individuals knowingly write checks against these balances to pay for purchases or other expenditures to third parties, they are committing a prosecutable offense known as check kiting.

Methods of Detection

Law enforcement officials need the cooperation of financial institutions in order to identify and prosecute check kiters. Obviously, banks benefit from early detection. For this reason, most banks have made efforts to discover such schemes before experiencing a loss. Traditionally, banks use some variation of what is commonly called a kiting suspect report, a standard form that is computer-generated by virtually all banks.

These reports work because kiting is almost always associated with the same warning signals. Even the most clever kiter cannot hide the signs that can accurately signal kiting activity. Together, these signals comprise the acronym "SAFE BANK":

* Signature and payee on kited checks are often the same

* Area abnormalities (many out-of-area checks)

* Frequent deposits, check writing, and balance inquiries

* Escalating balances

* Bank abnormalities (deposited checks are usually drawn on the same banks)

* Average length of time money remains in account is short

* NSF (frequent NSF problems)

* Keep banks from recognizing frequency of transactions by using ATM, night drop, drive up, and other branches for deposits and withdrawals.

The first kiting signal, signature and payee the same, is an indicator most often associated with cases involving a single perpetrator. Kiters working alone often use two or more types of accounts--such as personal, custodial, or business--and kite among them. In addition, to avoid suspicion, kiters may make a memo entry at the bottom of checks to provide justification for the increasingly large amounts of the checks. One kiter, for example, wrote checks to himself with memo entries for a trip to Spain and for the purchase of furniture, a car, and even a forklift. Such actions should raise a red flag to bank officials, as individuals rarely make checks out to themselves when making purchases--they write checks payable to the merchant.