Legal Definitions - check-kiting

Check-kiting is an illegal scheme where an individual or entity manipulates the banking system by exploiting the time it takes for checks to clear between different bank accounts. The perpetrator writes a check from one bank account that has insufficient funds and deposits it into another bank account. Before the first check can be identified as "bad" or unfunded by the bank it was drawn on, the individual then writes another check from the second account, relying on the temporary, artificially inflated balance created by the uncleared deposit. This creates a false impression of available funds, essentially giving the person an unauthorized, interest-free loan at the bank's expense, and puts the banks at significant financial risk.

Here are some examples illustrating check-kiting:

• Example 1: The Struggling Small Business Owner

  Maria owns a small bakery and has two business accounts: one at City Bank and another at Regional Credit Union. Her City Bank account is nearly empty, but she needs to make payroll for her employees this Friday. On Monday, knowing her City Bank account lacks sufficient funds, she writes a check for $10,000 from her City Bank account and deposits it into her Regional Credit Union account. The balance in her Regional Credit Union account immediately appears to increase by $10,000, even though the check from City Bank hasn't actually cleared. On Tuesday, Maria writes payroll checks totaling $9,000 from her Regional Credit Union account, hoping that the $10,000 check from City Bank will clear before the Regional Credit Union discovers that the City Bank account had insufficient funds to cover it. She intends to deposit actual customer payments into the City Bank account by Thursday to cover the initial check, but if those payments don't materialize, she has engaged in check-kiting.

  This illustrates check-kiting because Maria is using a check from an account with insufficient funds to artificially inflate the balance in another account, then drawing on those non-existent funds, exploiting the processing delay between banks.

• Example 2: The Individual Avoiding Overdrafts

  David has two personal checking accounts: Account A at First National Bank and Account B at Community Savings. Both accounts are very low on funds. David has an urgent bill for $500 due today, but neither account has enough to cover it. To avoid an overdraft fee and pay the bill, he writes a check for $500 from Account A (which only has $50) and deposits it into Account B. Immediately after, he writes a check for $500 from Account B to pay his bill, relying on the temporary $500 increase in Account B's balance. David hopes that by the time First National Bank processes the $500 check from Account A and discovers it's unfunded, he will have deposited his paycheck into Account A to cover it. If his paycheck is delayed or smaller than expected, both banks could suffer losses, and David would be engaging in check-kiting.

  This demonstrates check-kiting as David is creating an illusion of available funds by moving money between accounts he knows are underfunded, using the float time to make a payment he otherwise couldn't afford, and putting the banks at risk.