What is Kite?
Kite, in the context of accounting and finance, refers to a fraudulent practice where individuals or companies manipulate bank balances to create the illusion of liquidity or cover up financial difficulties. It involves exploiting the time it takes for checks to clear between different banks to artificially inflate available funds. Understanding kite is crucial for detecting and preventing financial fraud in banking and accounting.
Understanding Kite
Imagine someone playing with a kite, keeping it in the air by pulling on the string. That’s similar to kite in finance—it’s when someone moves money between accounts to create the illusion of having more funds than they actually do. This deceptive practice can have serious consequences for individuals and businesses involved in fraudulent activities.
Key Aspects of Kite
- Manipulation of Bank Balances: Kite involves manipulating bank balances to create false impressions of financial stability or liquidity. This may include transferring funds between accounts, issuing checks from accounts with insufficient funds, or engaging in other deceptive activities to inflate available balances.
- Exploitation of Clearing Times: Kite exploits the time it takes for checks to clear between different banks. By depositing checks from one account into another shortly before the end of the clearing cycle, individuals or companies can temporarily inflate balances and create the appearance of available funds that do not actually exist.
- Concealment of Financial Problems: Kite is often used to conceal underlying financial problems or cash flow shortages. Instead of addressing the root causes of financial difficulties, individuals or companies engage in kite to temporarily mask the issues and avoid detection or scrutiny from creditors, investors, or regulators.
Example of Kite
Let’s consider a hypothetical example to illustrate how kite works:
John owns a small business that is struggling with cash flow problems. In an attempt to conceal the company’s financial difficulties, John engages in kite by transferring funds between the company’s bank accounts and issuing checks from accounts with insufficient funds.
Here’s how the kite scheme unfolds:
- On Monday, John deposits a $10,000 check from one of the company’s clients into the company’s checking account at Bank A.
- Knowing that it takes several days for checks to clear, John immediately writes a $10,000 check from the same account to another business account at Bank B.
- On Tuesday, John withdraws $5,000 from the account at Bank B to cover immediate expenses.
- On Wednesday, the $10,000 check deposited into the account at Bank A clears, temporarily inflating the account balance.
- On Thursday, John repeats the process by depositing a $15,000 check into the account at Bank A and writing a $15,000 check from the same account to another business account at Bank B.
By repeating this cycle of depositing checks and writing checks against uncollected funds, John creates the illusion of sufficient funds in the company’s accounts while delaying the detection of cash flow problems or insufficient funds.
Conclusion
In conclusion, kite is a fraudulent financial practice that involves manipulating bank balances to artificially inflate available funds or conceal financial problems. It exploits the time it takes for checks to clear between different banks and can have serious consequences for individuals and businesses involved in fraudulent activities. By understanding the key aspects of kite, individuals, banks, and regulatory authorities can implement measures to detect and prevent financial fraud, safeguarding the integrity of the financial system.