Dictionary
Understanding the Financial Term "Kiting"
Kiting is a term used in the financial world to describe a practice where an individual or entity takes advantage of the float time in the banking system to manipulate the financial reporting, obtain unauthorized credit, or commit fraud. Float time refers to the period between when a check is deposited and when the funds become available. By exploiting this time gap, individuals could artificially inflate the balance in their bank accounts to make it seem larger than it actually is. This practice is illegal and can have serious consequences for those involved.
How Kiting Works
The concept of kiting revolves around the use of multiple bank accounts and the issuance of checks between these accounts. The perpetrator writes checks from one account (Account A) to another account (Account B), while knowing that there are insufficient funds in Account A to cover the checks. However, since there is typically a brief delay from the time a check is deposited to the time it clears, Account B will briefly show an increased balance before the check bounces due to lack of funds in Account A.
During this float time, the individual might issue additional checks from Account B to Account A or even to a third account (Account C). The goal here is to create a continuous cycle, rotating funds between accounts and delaying the real account balances from being discovered. By doing so, a kite runner can temporarily show falsely inflated balances across multiple accounts, potentially leading to unauthorized loans or other financial benefits.
Types of Kiting
There are several variations of kiting that may be encountered, each involving different strategies or targets. Here is a brief overview of the most common types:
Check Kiting: This is the classic form of kiting, as described earlier in the article, that involves the deliberate issuance of checks between multiple bank accounts with insufficient funds. The main objectives are to inflate the balance in one or more accounts or obtain unauthorized credit.
Retail Kiting: Retail kiting occurs when an individual purchases goods or services using a check from an account with insufficient funds. The individual then returns the purchased items to a different merchant for cash or deposits the funds to cover the outstanding check before it clears. This approach is essentially exploiting the float time in the banking system to obtain cash or goods without actually having the funds to cover the checks written.
Corporate Kiting: This type of kiting involves corporations and larger entities that manipulate their financial reporting or misuse funds from multiple bank accounts to create the illusion of higher liquidity and financial stability. Corporate kiting can involve the issuance of false invoices, inter-company loans or fictitious sales transactions to deceive creditors, investors, or regulators.
Detection and Prevention of Kiting
Banks and financial institutions have developed various procedures and systems to detect and prevent kiting schemes. Some common methods for controlling kiting include:
Faster Processing Times: Banking systems have introduced electronic check clearing and faster processing times to reduce the float time, making it increasingly difficult for kite runners to take advantage of the delay between check deposit and clearance.
Account Monitoring: Banks often closely monitor account activity and employ analytics to detect unusual patterns or transactions that could be indicative of kiting. This may include frequent transfers, large overdrafts, and rapidly changing account balances.
Account Restrictions: Financial institutions may place holds on new accounts, limiting access to funds until the legitimacy of the account and its sources have been verified.
Education and Training: Financial institutions invest in educating their staff and employees about the warning signs of kiting and the necessary steps to detect and report suspected kiting activities.
Legal Consequences of Kiting
Engaging in kiting is a fraudulent activity and carries both civil and criminal penalties. Depending on the size and scale of the scheme, individuals found guilty of kiting may face imprisonment, fines, restitution, and could also be barred from holding certain positions or working in specific industries.
In conclusion, kiting is a deceptive financial practice that can have serious and long-lasting consequences for both the perpetrators and the financial institutions involved. Banks and other financial entities actively work to counteract this type of fraud through various detection, prevention, and enforcement efforts. It is essential for individuals and businesses to be aware of the risks associated with kiting and to conduct their financial activities with integrity and transparency.