Check kiting is the illegal process of writing a check off of a bank account with inadequate funds to cover that check. Check kiting relies on the fact that it takes banks a few days or even longer for international checks to determine that a check is bad. Federal banking regulations state that funds must be available in a specified time.
The period dictated by Regulation CC is usually shorter than the time it takes for the bank that the check is drawn against to return the check. Some entities that participate in check kiting do so to obtain a short-term loan. Others want to intentionally defraud the bank.
Simple check-kiting schemes involve a check from a single bank, but more sophisticated schemes feature checks from multiple financial institutions. Businesses and individuals who want to gain access to funds that they do not have may participate in check kiting. For example, assume that a business has checking accounts with two different banks. Thanks to Regulation CC guidelines, the business receives access to the funds the next business day. It takes two to three days for the check to clear account A.
On day two, the business makes a deposit, narrowly preventing the bank from returning the check. The cash paid by the retailer for the second check is then deposited into the account so that the first check can clear. This leaves the second check still to clear, and the fraud is repeated in order to cover the amount of the second check. By repeating the fraud on an ongoing basis, a perpetrator could obtain a chain of items funded by fraudulent cashback transactions.
On some occasions a check kiting fraud can be more long term than simply cashing a single fraudulent check. In some cases, the perpetrator might build a relationship with a bank that is based on mutual trust. Find out how GoCardless can help you with ad hoc payments or recurring payments. GoCardless is used by over 60, businesses around the world.
Learn more about how you can improve payment processing at your business today. Learn more Sign Up. Retainer invoices allow you to collect down payments for projects. Contact sales. Skip to content Open site navigation sidebar. Personal Finance. Your Practice. Popular Courses. What Is Kiting? Key Takeaways Kiting involves the illegal use of financial instruments to fraudulently obtain additional credit. Securities firms "kite" if they fail to follow SEC rules around obtaining securities in a timely way.
Check kiting targets banks or retailers through a series of bad checks, sometimes drawn on multiple accounts. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. A checking account is a highly liquid deposit account held at a financial institution that allows deposits and withdrawals.
Euroclear Euroclear is one of two principal clearing houses for securities traded in the Euromarket and specializes in verifying information supplied by brokers involved in a securities transaction and the settlement of securities. What Is a Negative Float?
A negative float is the difference between checks written against and deposited in an account and those that have cleared according to bank records. Rebate A rebate in a short-sale transaction is the portion of interest or dividends paid by the short seller to the owner of the shares being sold short. Pay to Order Definition Pay to order refers to negotiable checks or drafts paid via an endorsement that identifies a person or organization the payer authorizes to receive money.
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