What it means
Cheque kiting takes advantage of float, which is the short period between a cheque being deposited and the money actually leaving the account that wrote it. A person with accounts at two banks writes a cheque from one account and deposits it in the other.
Before the first cheque clears, they write another from the second account to cover the first, and the cycle continues. The effect is that the account balances look larger than they really are, because the same money seems to be in two places at once.
Funds can be withdrawn against the false balance, and the person can in effect borrow from the banks without permission. When the cycle stops, the banks are left with the loss.
A cheque that has been kited is therefore one that is part of this chain. The word is also used for a cheque that has been altered to increase the amount, so it is worth confirming the meaning from the context.
Both uses involve a document that does not truthfully represent the money behind it. Kiting is a crime in many countries, and banks use monitoring systems to detect patterns such as frequent deposits and withdrawals between the same accounts.
Faster electronic payments have reduced the length of the float and made the scheme harder to run. Even so, the principle can apply to other types of transfer when settlement is delayed.
Businesses can fall into trouble unintentionally if they manage cash badly. For example, moving money between accounts to cover overdrafts, without enough real funds, may look similar to kiting to a bank.
Finance teams should keep clear records, match balances regularly and never rely on uncleared funds. For auditors, repeated transfers around the period end can be a warning sign.
Window dressing of cash balances using transfers that are reversed just after the reporting date is a related concern. Reconciliation of bank statements to the ledger is the standard control.
In practice
Real-world examples.
Example
A small trader has accounts at two banks, each with $2,000. He writes a $10,000 cheque from the first account to the second and withdraws $8,000 before it clears. The next day he covers the first account with a $10,000 cheque from the second, and the pattern continues until the banks spot it.
Example
A bank's fraud team notices that two accounts exchange large cheques every day with no clear business purpose. It places a hold on the deposits and investigates. The account holder is asked to explain the transfers and to provide invoices or contracts that support them.
Example
An auditor reviewing a company's year-end bank balances sees large transfers between two accounts on the last day, reversed on the first day of the next period. She asks for supporting documents and tests whether the cash balance was inflated. The company has to restate the figures in its report and strengthen its approval process for transfers between accounts.
Case study
Seen in the real world.
Silverline Printing is an illustrative, fictional business whose owner ran into cash problems. He opened a second account at another bank and began writing cheques between the two to cover payroll.
For three weeks the pattern worked, and balances reached as much as $80,000 in apparent funds, although the real money was under $5,000. A bank analyst noticed that the same amounts passed back and forth with no sales or purchases behind them, and froze both accounts.
The owner faced heavy penalties and lost his banking relationship. The illustrative lesson was that kiting hides a cash problem instead of solving it, and a straightforward conversation with a lender about a short-term facility would have cost far less. The case also shows why banks reconcile deposits against what has actually cleared. Had the second bank released funds only after the first cheque cleared, the scheme could not have run for even a few days.
Watch out
Common mistakes.
- Believing that moving money between your own accounts is harmless, when depending on uncleared funds to cover payments can amount to fraud.
- Assuming that modern payment systems have ended the risk, when any delay in settlement can be exploited.
- Ignoring unusual patterns of transfers at the period end, which auditors and banks treat as a warning sign.
Questions
People also ask.
What does kited mean?
It describes a cheque used in a kiting scheme, where funds are passed between accounts to create a balance that does not really exist.
Is kiting illegal?
In many countries it is treated as fraud, because it uses uncleared funds to obtain money from a bank without its knowledge.
How do banks detect it?
They monitor for repeated large deposits and withdrawals between the same accounts, unusual use of float and limited genuine business activity.
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