Kiting is the fraudulent use of a financial instrument to obtain additional credit that is not authorized. It encompasses two main types of fraud:
- Issuing or altering a check or bank draft, for which there are insufficient funds. * Misrepresenting the value of a financial instrument for the purpose of extending credit obligations or increasing financial leverage.
Key Takeaways
- Kiting involves the illegal use of financial instruments to fraudulently obtain additional credit.
- Securities firms may “kite” if they fail to follow regulations around obtaining securities in a timely manner.
- Check kiting targets banks or retailers through a series of bad checks, sometimes drawn on multiple accounts.
Check Kiting Involving Banks
Carried out within the banking system, kiting typically involves passing a series of checks at two or more banking institutions using accounts that have insufficient funds. Relying on the float time required for a check deposited at one bank to clear at another, the kiter writes a check at the first bank against an account at the other.
Before that check clears, they withdraw the funds from the second bank account and deposit the funds back into the first bank. The process may be repeated in the opposite order, sometimes repeatedly. The net result is a series of fraudulent withdrawals that rely on staying a step ahead of the fraudulent check clearing.
Reduced times for checks to clear have decreased the incidence of check kiting involving banks. Other preventive measures include banks placing holds on deposited funds and charging for returned checks.
Protect Yourself from Retail Kiting
A variant of check kiting, known as “retail kiting,” relies on cashing a bad check (number one) at a retailer to purchase an item. Before that check has cleared, the kiter writes another check (number two), which may include a cashback payment. The cash from check number two is then deposited into the account to allow check number one to clear. The fraud is then repeated to cover check number two, sustaining the scheme to stay ahead of the float and fraudulently obtain a series of items and cash withdrawals.
Securities Kiting and How to Spot It
Kiting involving misrepresenting securities generally occurs when firms flout regulations regarding the timely delivery of buy-and-sell transactions which must be completed within a settlement period. If a firm fails to receive the securities within that timeframe, it is required to purchase the shortage on the open market and charge the delinquent firm for any associated fees.
The delinquent firm practices the fraudulent act of kiting if it fails to purchase the securities on the open market, maintains a short position, delays delivery, or takes part in transactions contrary to proper trade settlement.
By understanding these kiting practices and recognizing red flags, you can protect yourself from becoming a victim of fraud. Stay informed and vigilant to secure your financial health.
Related Terms: fraud prevention, check fraud, SEC regulations, short position, leverage.
References
- U.S. Securities and Exchange Commission. “Amendment to Securities Transaction Settlement Cycle-A Small Entity Compliance Guide”.
- Code of Federal Regulations. “17 CFR §242.204”.
