What is Check Kiting?
Check kiting refers to the illegal practice of writing a check from a bank account that has insufficient funds to cover it. Check kitting is based on the fact it takes banks a few days (or more for international checks) To determine if a check is not acceptable.
Federal banking regulations require that funds be available within a certain time. Regulation CC usually dictates a shorter time frame than the actual time.it takes for the bank that the check is drawn against to return the check.
Check kiting is a way for entities to get a short-term loan. Others may want to deliberately defraud the bank. Check-kiting is a simple scheme that involves a check from one bank. However, more complex schemes include checks from multiple financial institutions.
Also read: What is a Payment Bond A Short Guide
Example of check kiting
Check kiting is a way for individuals and businesses to access funds they don’t have. Let’s say that a company has two checking accounts with different banks. The business needs to pay payroll but is short $10,000. The business sends a check for $10,000 to account A. It then deposits the check into account B. The business has access to the funds within the next business day thanks to Regulation CC guidelines.
It can take up to three days for check A to clear. The bank is unable to return the check if the deposit is made by the business on day 2. Even though the money was ultimately deposited into account A by the business, it is still illegal check kitting.
Here’s a more dangerous example of check-kiting. A bank establishes a relationship with an individual. The individual then writes and deposits checks for $5,000 and $5,000 from banks A into account C. However, neither bank A nor B has the money to pay the checks. The individual then withdraws all the money as soon as funds at bank C are available. Bank C has a $10,000 shortfall if the banks give back the bad checks.