Key takeaways
– Kiting is a fraud that uses timing differences in payment systems (most commonly checks) to obtain unauthorized credit or cash.
– Common forms are check kiting, retail kiting (using retailers’ acceptance of checks/cashback), and securities kiting (manipulating settlement/delivery of trades).
– Modern clearing systems and bank policies (holds, image-based clearing, positive-pay) have reduced traditional kiting, but vigilance is still required.
– Banks, retailers, investors and consumers can each take concrete steps to detect, prevent and respond to kiting incidents.
What is kiting?
Kiting is the deliberate manipulation of payment or settlement timing to make it appear that funds exist when they do not. The kiter exploits the “float” — the delay between when a payment (e.g., a check) is deposited and when the funds are actually collected from the payer’s bank — to create temporary, unauthorized credit that can be withdrawn or spent before the instrument bounces.
Three common variants
1. Check kiting
– How it works (simple numeric example): Person A opens accounts at Bank X and Bank Y. Account balances are insufficient. A writes a $10,000 check from Account X and deposits it in Account Y. Bank Y initially credits Account Y for the deposit before Bank Y actually collects from Bank X (float). Before the first check is returned for insufficient funds, A withdraws the $10,000 from Account Y. To cover the impending NSF, A then writes a $10,000 check from Account Y and deposits it in Account X, repeating the cycle to stay ahead of clearing. The result is repeated, fraudulent short-term credit until the scheme collapses.
– Why it used to work: Longer check-clearing times and slower interbank communication created exploitable windows. Modern faster clearing and holds have reduced occurrences but not eliminated the risk.
2. Retail kiting
– How it works: The kiter cashes a bad (insufficient-funds) check at a retailer to buy merchandise or get cash-back. Before that check clears, the kiter obtains another check or payment (possibly including cash-back) to cover the first one, deposits it to their account, and uses that to allow the first check to clear. The cycle may repeat to extract goods or cash from multiple retailers.
– Why retailers are vulnerable: Some merchants still accept checks and provide cash-back, creating small windows of float that a kiter can exploit.
3. Securities kiting
– How it works: Securities settlement in the U.S. generally must be completed within a specified settlement period (historically T+3, now shorter). If a firm fails to deliver purchased securities on time, rules require it to buy the shortage in the open market or otherwise settle. If a firm deliberately delays delivery, maintains artificial short positions, or otherwise manipulates settlement to use or borrow securities it does not own, regulators may classify that behavior as kiting or fraudulent settlement practices.
– Regulatory context: SEC rules and guidance cover settlement obligations and firms’ responsibilities to complete trades and deliver securities (see SEC guidance on settlement cycles and 17 CFR §242.204 for related rules and reporting requirements).
Why kiting is illegal and the risks
– Criminal and civil exposure: Kiting typically constitutes fraud. In the U.S., bank kiting can lead to federal charges such as bank fraud (see 18 U.S.C. § 1344) as well as state-level fraud and theft charges. Securities kiting can lead to regulatory enforcement by the SEC, fines, disgorgement, suspension or revocation of licenses, and possibly criminal charges.
– Financial losses and reputation damage: Victims (banks, retailers, counterparties) can suffer direct losses, operational costs, and reputational harm. For perpetrators, consequences include restitution, fines and imprisonment.
How banks and other institutions detect kiting (red flags)
– Repeated deposits of out-of-state or large checks followed by quick large withdrawals
– Same or related names on multiple accounts across institutions used alternately as funding and recipient accounts
– Frequent deposits and immediate cash withdrawals instead of normal account activity
– Multiple returned checks citing insufficient funds
– Rapid sequence of deposits and withdrawals timed around expected clearing
– Unusually structured or circular transfers among accounts
– Patterns revealed by automated transaction monitoring and anomalies flagged by rules/AI
Practical steps to prevent kiting
For banks and credit unions
– Use real-time transaction monitoring with rules for circular deposits/withdrawals, multiple NSF returns, and atypical float exploitation.
– Apply longer holds or delayed availability on suspect deposits (consistent with Regulation CC and published funds availability policies).
– Implement positive pay and reverse positive pay to match presented checks to issued checks.
– Require stricter identification and verification for new accounts and large or frequent check deposits.
– Charge fees and return checks promptly when NSF is determined; quickly close accounts with repeated kiting behavior.
– Share information about confirmed fraudsters through appropriate channels (with legal/regulatory compliance).
For retailers
– Limit acceptance of checks, require ID verification, or restrict check acceptance by dollar amount.
– Avoid offering or limit cash-back on check transactions.
– Use electronic payment methods (debit/credit) that settle faster and have stronger authentication.
– Train staff to recognize suspicious check behavior (new customers with large checks, same customer buying expensive items repeatedly with checks).
For investors and securities firms
– Strictly adhere to settlement obligations; maintain adequate fail-safe procedures to buy in shortages timely.
– Monitor trade fails and overdrafts in securities positions; use straight-through processing (STP) and fail-detection tools.
– Maintain robust supervisory compliance programs aligned with SEC rules (see SEC guidance and 17 CFR §242.204).
For consumers and small businesses
– Know your actual account balance, not just available balance; be wary of relying on pending deposits.
– Avoid lending your account or check-writing ability to others.
– Use electronic transfers (ACH, wire) where faster settlement and authentication reduce float risk.
– Reconcile accounts daily if feasible, and set up alerts for large deposits/withdrawals or low balances.
What to do if you suspect you are a victim or have seen kiting
– Contact your bank immediately: request a fraud investigation and ask to freeze affected accounts if needed.
– Collect documentation: copies of checks, deposit slips, receipts, and a timeline of transactions.
– Report to law enforcement: file a police report for local authorities; for bank fraud, consider reporting to federal law enforcement.
– For securities concerns: notify the broker-dealer and the SEC Office of Investor Education and Advocacy or the SEC’s tips/complaints mechanism if you believe settlement rules were violated.
– File consumer complaints: contact the Consumer Financial Protection Bureau (CFPB) or the Federal Trade Commission (FTC) for consumer-facing fraud issues.
– If retail loss occurred, contact the retailer first; merchants may cooperate with investigations and may have fraud policies.
Example scenario (concise)
– Day 1: Person deposits $20,000 check from Account A into Account B. Bank B credits Account B but funds are not yet collected.
– Day 2: Person withdraws $18,000 cash from Account B.
– Day 3: Before Bank B can collect the $20,000 check, the person deposits another $20,000 check from Account B into Account A to cover the first check.
– The scheme repeats until a bank returns one of the checks or unable to maintain the cover, causing large losses and legal consequences for the person conducting the scheme.
Regulatory references
– Securities settlement guidance and regulatory requirements: U.S. Securities and Exchange Commission — “Amendment to Securities Transaction Settlement Cycle — A Small Entity Compliance Guide” (see SEC guidance on settlement cycles).
– SEC rule/reporting references: 17 CFR § 242.204 (related reporting/disclosure requirements for certain transaction settlement matters).
– Bank fraud statute: 18 U.S.C. § 1344 (bank fraud), which can apply in serious kiting schemes.
Bottom line
Kiting is a deliberate fraud that exploits timing gaps in payment and settlement systems. Although technological improvements and regulatory safeguards have reduced the traditional window for check kiting, variants (including retail and securities kiting) still pose risks. Detection depends on strong transaction monitoring, operational controls, and prompt action by banks, retailers and regulators. Consumers should protect themselves by monitoring account activity and using faster, authenticated payment methods.
Sources
– Investopedia, “Kited” (overview of check, retail and securities kiting)
– U.S. Securities and Exchange Commission, guidance on securities transaction settlement cycle and related compliance materials
– Code of Federal Regulations, 17 CFR § 242.204
– United States Code, 18 U.S.C. § 1344 (bank fraud)
– Draft a short checklist banks or retailers can use to detect potential kiting.
– Create a one-page consumer handout explaining how to spot and report suspected kiting. Which would be more useful?