What is check kiting?

Check kiting is an illegal way some people try to get money from banks. It’s a type of fraud. People who do check kiting write checks from different bank accounts they have. The way they do it makes it seem like they have more money than they really do.

Writing bad checks on purpose

Let’s say a person has two bank accounts but not much money in them. This person might write a check for $500 from the first account and deposit it in the second account. Then they write a $500 check from the second account and deposit it in the first account. On paper, it looks like both accounts have $500. But there’s no real money behind those checks.

Floating checks between accounts

The banks take a few days to figure out those checks are no good. While they’re doing that, the bad checks are said to be “floating”. During this time, the person’s account balances look $500 higher than they should be. The person is getting an interest-free loan from the bank without the bank knowing it. That’s the main point of check kiting – to get access to money you shouldn’t have.

Why do people do check kiting?

People usually do check kiting because they want money fast but don’t want to pay interest on a loan. Or maybe they need to make their bank account look better than it is. Some reasons a person might do check kiting are:

To get a free “loan” from the bank

Writing bad checks back and forth lets the person spend money they don’t really have. It’s like getting a loan without having to pay interest or fees. Of course, this loan isn’t approved by the bank. The bank doesn’t even know it’s giving this loan. That’s why check kiting is illegal.

To make an account look better

Sometimes people do check kiting to make their account balance look higher than it really is. They might do this to trick someone else into thinking they have a lot of money. For example, they may want to impress a business partner or get a real loan from the bank.

To cover up other problems

Check kiting can also be a way to hide other financial problems. Let’s say a business is having trouble paying its bills. The owner might use check kiting to make it look like there’s more money coming in than there really is. This can temporarily hide the problem but doesn’t fix it.

How do banks catch check kiting?

Banks have several ways to spot check kiting. They use special software to look for warning signs. Some things they look for are:

Checks going back and forth

The software looks for patterns like checks being written back and forth between accounts. Especially if the accounts are at different banks. This is a red flag that someone might be kiting checks.

Checks that are close in amount

If the checks being passed around are for similar amounts, that’s another warning sign. Real payments are usually for varying amounts. Checks that are close in amount could mean someone is just trying to float money around.

Accounts with a lot of activity

The software also looks for accounts that suddenly have a lot of activity. If an account that’s usually pretty quiet starts having a bunch of big checks coming in and out, the bank will look closer to see what’s going on.

Checks that take a long time to clear

Banks also watch for checks that are taking longer than usual to clear. This could mean the check is being “floated” as part of a kite. The longer it floats, the more time the person has to use money they shouldn’t have access to.

What happens if you get caught check kiting?

Check kiting is a serious crime. If you get caught, you could face major consequences like:

Criminal charges

Check kiting is a form of bank fraud. That’s a felony offense. If you’re convicted, you could face years in prison. The exact punishment depends on how much money was involved and what state you’re in.

Fines and restitution

On top of jail time, you’ll probably have to pay fines. The court might also order you to pay restitution. That means paying back all the money you got through your kiting scheme.

Damage to your credit

A check kiting conviction will trash your credit score. It will be very hard to get loans or credit cards in the future. You might also have trouble renting an apartment or getting certain jobs.

Loss of bank accounts

The banks involved in your scheme will almost certainly close your accounts. They may also report you to a database that other banks check. This could make it very hard for you to open a bank account anywhere else.

Real-life examples of check kiting

There have been some famous cases of check kiting over the years. Here are a few examples:

The E.F. Hutton case

In the 1980s, the investment firm E.F. Hutton got caught in a big check kiting scheme. They were writing checks between banks to get interest-free loans. The scheme fell apart and the company pleaded guilty to 2,000 counts of mail and wire fraud.

The Denny Hecker case

Denny Hecker was a car dealer in Minnesota. In 2010, he was sentenced to 10 years in prison for check kiting and other financial crimes. He wrote over $80 million worth of bad checks to keep his dealerships afloat.

The Nick Saban case

Even famous football coach Nick Saban once got tangled up in a check kiting case. In the early 1990s, he was an investor in a car dealership that got caught kiting checks. Saban himself wasn’t charged with anything, but the dealership went bankrupt.