Thursday, 25 April 2024
Check-kiting is the illegal act of writing a check from a bank account without sufficient funds and depositing it into another bank account. Then, you withdraw the money from that second account before the original check has been cleared. Sometimes the scam is performed by an individual who is aware that the funds won’t cover the check, but hopes to gain a personal profit by deceiving the financial institution. Other times, check-kiting can occur in the form of a scam where counterfeit checks are used to deceive others.
Check-kiting is also known as “taking advantage of the float.” Float time is the amount of time between when an individual submits a check as payment and when the individual’s bank is instructed to move the funds from the account.
Say, for example, that you write yourself a check for $500 from checking account A, and deposit that check into checking account B — but the balance in checking account A is only $75. Then, you promptly withdraw the $500 from checking account B. This is check-kiting, a form of check fraud that uses non-existent funds in a checking account or other type of bank account. Some check-kiting schemes use multiple accounts at a single bank, and more complicated schemes involve multiple financial institutions.
In a more complex scenario, a person could open checking accounts at bank A and bank B, at first depositing $500 into bank A and nothing in bank B. Then, they could write a check for $10,000 with account A and deposit it into account B. Bank B immediately credits the account, and in the time it might take for bank B to clear the check (generally about three business days), the scammer writes a $10,000 check with bank B, which gets deposited into bank A to cover the first check. This could keep going, with someone writing checks between banks where there’s no actual funds, yet the bank believes the money is real and continues to credit the accounts.
In addition to scammers using check-kiting to take advantage of the float for their own personal gain or to make payroll or keep the lights on for their own business, there are other scenarios where you could encounter check fraud as a consumer. Say that you’re selling a piano on an online site like Craigslist or in a resale group on Facebook. A scammer could write you a check for an amount greater than the price you asked for, and then later “catch” his mistake and ask you to wire back the difference. However, the scammer’s check later bounces, and you’re on the hook for the entire amount. The scammer and the piano disappear.
Other times, major check-kiting schemes will make headlines. A South Carolina businessman recently pleaded guilty for running a Ponzi scheme and a check-kiting scam that involved $5 million a month. He told investors that he had leads on auto sales from local credit unions, and convinced them to provide financing to buy the cars in exchange for $800 in interest for each car sold to credit union members. He deposited and withdrew funds from the investors between multiple local bank accounts in a check-kiting operation.
To avoid becoming a victim to a check-kiting scam, never wire money to strangers, and know who you are dealing with when making financial transactions. You should also resist any pressure to “act now” — a sense of urgency is a red flag. Furthermore, keep in mind that if an offer or deal seems too good to be true, your instincts are probably right.
When it comes to check-kiting, banks themselves also keep an eye out for some specific red flags. These include a bank account with a large number of checks deposited each day and many checks withdrawn from the same bank account. Other indicators of potential check-kiting could be large amounts of cash in an account that has yet to clear the paying bank and deposits made through multiple bank branches.
Check-kiting is illegal and is considered fraud. The penalties could vary, and they often depend on the bank or credit union and the severity of the act. Sometimes, if the amount of money is paid back, the bank will allow the account holder to keep the account and perhaps remove some features, such as the ability for the account holder to deposit personal checks. Other times, the check-kiter could be reported to ChexSystems, which is a consumer reporting agency like Experian, TransUnion and Equifax. Check-kiters could also face legal penalties and imprisonment.
When in doubt, stay away from anyone that you suspect might be involved in this type of scam. Keep in mind that check-kiting is intentional, and the individual knows that they do not yet have the funds to cover the check. When checks are used an a form of unauthorized credit, consequences will surely follow.
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Source: https://www.magnifymoney.com/blog/banking/check-kiting/
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