Financial fraud takes many forms, but few are as deceptive and damaging as kiting. As someone who has spent years dissecting financial crimes, I find kiting particularly fascinating because it exploits the time delays in banking systems. In this guide, I’ll break down what kiting is, how it works, and why it remains a persistent threat in the U.S. financial landscape.
Table of Contents
What Is Kiting?
Kiting, also known as check kiting or float fraud, is a form of financial fraud where someone intentionally writes a check from an account with insufficient funds, relying on the time lag in check clearing to cover the deficit. The fraudster moves money between accounts or institutions to create a false balance, effectively “floating” funds that don’t exist.
The Mechanics of Kiting
At its core, kiting exploits the float period—the time between when a check is deposited and when the funds are withdrawn from the issuer’s account. Banks in the U.S. typically take 1-3 business days to clear checks, though some transactions may take longer.
Here’s a simplified example:
- Day 1: I have $500 in Bank A. I write a $1,000 check to myself and deposit it into Bank B.
- Day 2: Before Bank A processes the check, I withdraw $800 from Bank B, assuming the funds are available.
- Day 3: If I deposit another check from Bank B back to Bank A before the original check bounces, I artificially inflate my balance.
This creates a cycle where I rely on the time delay to keep the scheme running.
Mathematical Representation
The fraud depends on the float time (t_f) and the transaction velocity (v). If the fraudster moves money faster than the clearing time, the scheme can persist.
v > \frac{1}{t_f}If the clearing time is 2 days, the fraudster must cycle funds at least every 1.5 days to avoid detection.
Types of Kiting
Kiting isn’t limited to personal checks. It manifests in different ways:
| Type | Description | Example |
|---|---|---|
| Check Kiting | Using bad checks across multiple accounts. | Writing a check from Bank A to Bank B with no funds. |
| Credit Card Kiting | Opening multiple cards to pay off balances cyclically. | Using Card B to pay Card A’s minimum payment. |
| Securities Kiting | Falsely inflating stock values through rapid buy-sell cycles. | Pump-and-dump schemes. |
Real-World Case: The E.F. Hutton Scandal
One of the most infamous kiting cases in U.S. history was the E.F. Hutton scandal of the 1980s. The brokerage firm systematically overdrew accounts at smaller banks, earning interest on “phantom funds.” They exploited the float to generate millions before regulators intervened.
How They Did It
- Overdraft Exploitation: Hutton wrote checks against accounts with insufficient funds.
- Bank Hopping: They used multiple banks to extend the float period.
- Interest Arbitrage: The “borrowed” funds earned short-term interest.
The scheme collapsed when banks noticed the pattern, leading to fines and reputational damage.
Legal Consequences
Kiting is illegal under U.S. federal law (18 U.S. Code § 1344) and can lead to:
- Criminal charges (fraud, wire fraud)
- Civil penalties (fines, restitution)
- Banking restrictions (account closures, blacklisting)
The Dodd-Frank Act and Expedited Funds Availability Act (EFAA) impose stricter check-clearing rules to curb such fraud.
How Banks Detect Kiting
Banks use algorithms to flag suspicious activity, such as:
- High-velocity transactions (rapid deposits/withdrawals)
- Frequent overdrafts followed by quick deposits
- Circular transactions (money moving between the same accounts)
Detection Formula
A basic fraud score (S_f) might look like:
S_f = \frac{\text{Number of Overdrafts}}{\text{Total Transactions}} \times \frac{\text{Frequency of Deposits}}{\text{Average Clearing Time}}If S_f exceeds a threshold, the account gets flagged.
Protecting Yourself from Kiting
For Consumers
- Avoid “floating” checks—assume funds take time to clear.
- Monitor accounts daily to catch unauthorized transactions.
- Use electronic payments (ACH, wire transfers) for faster settlement.
For Businesses
- Implement positive pay systems to verify checks.
- Set up alerts for unusual transactions.
- Train employees to recognize kiting patterns.
Final Thoughts
Kiting is a high-risk, high-reward fraud that preys on banking inefficiencies. While regulations have tightened, the rise of digital payment systems introduces new vulnerabilities. Understanding how kiting works helps individuals and businesses stay vigilant.
