Kiting is a forgery of financial instruments for extending credit liabilities or increasing the potential opportunity to manage the profit of the organization by changing the volume and components of equity and debt capital.
Check Kiting with banks
Kiting is usually defined as the process of issuing a check in one banking institution for an amount exceeding the account balance and transferring it to the account in another bank. In other words, there is some time in which the kiter transfers money from one check to another one.
After that the kiter takes money out of the account in the second bank and covers the first account with money that never existed. Thus, checks are used as an illegal loan, not as an instrument. These actions can be repeated multiple times. The purpose of this illegal process is to artificially inflate the balance of the checking account to allow documents to clear.
It is known that the bank transfer time takes about one to five working days. This depends on the location of the banking institution. The time gap is called “a float”. The reduction of time required to withdraw money from the first bank account has led to prevention of fraud connected with checks.
The indicators of kiting may be:
- The fact that the check issuer and the payor are one person.
- Checks with “unusual” addresses, as people who are interested in kiting tend to get more time.
- Frequent bank requests.
Retail kiting is one of the kinds of check kiting. It is based on depositing a document at a shop to buy a product. Before the process of check clearing is done, the person makes one more order to the bank to transfer funds to another account. After that the kiter covers the first account and the first document can be used in financial transactions.
Fraud and securities
Kiting may involve illegal activities done with securities. Kiting connected with giving false information about financial instruments happens when organizations that deal with trading in securities oppose regulations of the Securities and Exchange Commission. They don’t comply with the time limit of buy-and-sell transactions. Generally, they should be conducted within the trade date and three following days.
If an organization doesn’t receive financial instruments in three days, it should buy lacking securities in the market and ask this company to pay back the fee.