Check Kiting Is No Game

Despite the business community's rapid adoption of digital payment methods, some companies continue to rely on paper checks. But there's a long-standing problem with checks: They make businesses vulnerable to several damaging types of fraud, including check kiting. Here's how the scheme works.

Riding the Float

In a check kiting scheme, the perpetrator takes advantage of the "float," or the time between when a check is deposited and when the bank collects funds on the check. In essence, a bank that accepts check deposits and releases funds immediately provides account holders with interest-free loans. Some unethical businesses take advantage of this process because it temporarily inflates their account balances.

Although the total number of days it takes banks to process checks and collect funds has declined in recent years, there's still some opportunity to capitalize on the float. This is especially true when banks, in the interest of good customer service, release funds on the same day that they receive a deposit and before they've had a chance to present a check for payment.

Check kiting schemes typically involve two or more banks, although some schemes can involve multiple accounts at one bank if there's a lag in how the institution processes checks. The perpetrator's goal is to falsely inflate the balance of a checking account so that written checks that otherwise would bounce, clear. Sometimes, check kiting involves the periodic deposit of legitimate funds, which typically minimizes the likelihood that a bank will detect the scheme quickly.

Grounding the Kite

Check kiting is a federal crime and the penalties can be stiff: up to thirty years in federal prison, plus fines of up to $1 million. Even if a bank declines to press charges, it may close an account and report the incident to ChexSystems, which is similar to a credit bureau. This can make opening new business accounts difficult.

The following five strategies can help prevent people in your organization from using your company's accounts for check kiting:

1. Educate employees about bank fraud. Describe to employees the types of transactions that qualify as bank fraud and their red flags. This makes workers more aware of suspicious activities in their midst and demonstrates management's commitment to preventing fraud.
2. Rotate key accounting roles. Fraud flourishes when internal controls aren't followed. Segregate accounting duties and, if possible, rotate tasks among staffers. If fraud is afoot, rotating jobs can help uncover the scheme and reduce the amount of time the perpetrator has to steal from your company.
3. Reconcile bank accounts daily. Make sure someone trustworthy, who isn't involved in issuing payments, reconciles every bank account your company operates. Ideally, this should happen every day. Provide the responsible employee with clear instructions on how to handle any exceptions that might be revealed during the reconciliation process.
4. Maintain control of paper checks. Store blank checks in a locked cabinet or safe and limit who's allowed to order blank checks. Require at least two individuals to place or approve the order. Also, periodically conduct an inventory of blank check stock, including a review for any missing checks pulled and used out of sequence.
5. Go digital. The most effective way to prevent kiting and other forms of check fraud is to stop using paper checks altogether. Consider replacing them with ACH payments or another form of electronic payments.

Note that these actions can also help you detect and minimize the risk of other forms of bank fraud, such as employees stealing company checks and making them payable to themselves.

Too Easy to Perpetrate

Check kiting is a relatively easy scheme to perpetrate, particularly if your company doesn't keep an eye on its check stock and bank account activity. The steps detailed here can prevent many schemes and associated financial losses. But for more comprehensive internal controls, talk to a forensic accountant.