Check kiting
Encyclopedia
Cheque fraud/check fraud refers to a category of criminal acts
that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. Most methods involve taking advantage of the float
(the time between the negotiation of the cheque and its clearance at the cheque-writer's bank) to draw out these funds. Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period to cover the fraud, and paper hanging, where the float offers the opportunity to write fraudulent checks but the account is never replenished.
to take advantage and delay the notice of non-existent funds.
Such crimes are often used by petty criminals to obtain funds through a quick embezzlement
, and are frequently conducted using a fictitious or stolen identity in order to hide that of the real offender.
This form of fraud is the basis for the Nigerian cheque scam and other similar schemes; however, in these cases, the victim will be the one accused of committing such crimes, and will be left to prove his/her innocence.
is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's legitimate cheques, that have either been altogether stolen and then cashed, or altering a cheque that has been legitimately written to the perpetrator, by adding words and/or digits in order to inflate the amount.
Other cases involved the use of completely fake cheques, as in the case of Frank Abagnale
. The perpetrator passes or attempts to pass a cheque that has been manufactured by him/herself, but that represents a non-existent account.
"Cheque washing
" involves the theft of a cheque in transit between the writer and recipient, followed by the use of chemicals to remove the ink representing all parts other than the signature. The perpetrator then fills in the blanks to his or her advantage.
Sometimes the cheque fraud comes from an employee of the bank itself, as was the case with Suzette A. Brock, who was convicted of theft for writing five corporate cheques to her own birth name from her desk as a loan servicing agent for Banner Bank of Walla Walla, WA.
The most notorious "bad cheque artist" of the 20th century, Frank Abagnale
, devised a scheme to put incorrect MICR numbers at the bottom of the cheque he wrote, so that they would be routed to the incorrect Federal Reserve Bank
for clearing. This allowed him to work longer in one area before his criminal activity was detected.
for an amount of money the writer knows is not in the account at the time of negotiation (or available for overdraft protection) is usually considered a violation of criminal law
. However, the general practice followed by banks has been to refrain from prosecuting cheque writers if the cheque reaches the bank after sufficient funds have been deposited, thereby allowing it to clear. But the account holder is normally held fully liable for all bank penalties, civil penalties, and criminal charges allowable by law in the event the cheque does not clear the bank.
Only when the successful clearance of a cheque is due to a kiting scheme does the bank traditionally take action. Banks have always had various methods of detecting kiting schemes and stopping them in the act. Computer systems in place will alert bank officials when a customer engages in various suspicious activities, including frequently depositing cheques bearing the same, large monthly total deposits accompanied by near-zero average daily balances, or avoidance of tellers by frequent use of ATMs for deposits.
New technology in place today may make most forms of cheque kiting and paper hanging a thing of the past. As new software rapidly catches illegal activity at the teller/branch level instead of waiting for the nightly runs to the back office, schemes are not only easier to detect, but may be prevented by tellers who deny customers illegal transactions before they are even started.
Before the passage of the Check Clearing for the 21st Century Act
, when cheques could take 3 or more days to clear, playing the float was fairly common practice in otherwise-honest individuals who encountered emergencies right before payday.
Circular and abandonment frauds are gradually being eliminated as cheques will clear in Bank B the same day they are deposited into Bank A, giving no time at all for non-existent funds to become available for withdrawal. With image-sharing technology, the funds that temporarily become available in Bank A's account are wiped out the same day.
While there may still be some room for retail kiting, security measures taken by retail chains are helping reduce such incidents. Increasingly, more chains are limiting the amount of cash back received, the number of times cash back can be offered in a week or a given period of time, and obtaining transactional account balances before offering cash back, thereby denying it to those with low balances. For example, Wal-Mart
's policy is to determine account balances of those obtaining cash back, and some Safeway
locations will not offer cash back on any accounts with balances under $250, even when funds are sufficient to cover the amount on the cheque. Customers who are noted to obtain cash back frequently are also investigated by the corporation to observe patterns.
Some businesses will also use the cheque strictly as an informational device to automatically debit funds from the account, and will return the item to the customer thereafter. However, in the United States
this is done through the Automated Clearing House
(ACH); though faster than traditional cheque clearing, contrary to popular belief the ACH is not instantaneous. Though this practice reduces the room for kiting (by reducing float), it does not always eliminate it.
Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. Most methods involve taking advantage of the float
Float (money supply)
In economics, float is duplicate money present in the banking system during the time between a deposit being made in the recipient's account and the money being deducted from the sender's account. It makes up the smallest part of the money supply....
(the time between the negotiation of the cheque and its clearance at the cheque-writer's bank) to draw out these funds. Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period to cover the fraud, and paper hanging, where the float offers the opportunity to write fraudulent checks but the account is never replenished.
Cheque kiting
Check kiting refers to use of the floatFloat (money supply)
In economics, float is duplicate money present in the banking system during the time between a deposit being made in the recipient's account and the money being deducted from the sender's account. It makes up the smallest part of the money supply....
to take advantage and delay the notice of non-existent funds.
Embezzlement
While some cheque kiters fully intend to bring their accounts into good standing, others, often known as paper hangers, have pure fraud in mind, attempting to "take the money and run."Bad cheque writing
A cheque is written to a merchant or other recipient, hoping the recipient will not suspect that the cheque will not clear. The buyer will then take possession of the cash, goods, or services purchased with the cheque, and will hope the recipient will not take action or will do so in vain.Abandonment
The paper hanger deposits a cheque one time that s/he knows is bad or fictitious into his/her account. When the bank considers the funds available (usually on the next business day), but before the bank is informed the cheque is bad, the paper hanger then withdraws the funds in cash. The offender knows the cheque will bounce, and the resulting account will be in debt, but the offender will abandon the account and take the cash.Such crimes are often used by petty criminals to obtain funds through a quick embezzlement
Embezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
, and are frequently conducted using a fictitious or stolen identity in order to hide that of the real offender.
This form of fraud is the basis for the Nigerian cheque scam and other similar schemes; however, in these cases, the victim will be the one accused of committing such crimes, and will be left to prove his/her innocence.
Forgery
Sometimes, forgeryForgery
Forgery is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and willful misrepresentations. Forging money or...
is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's legitimate cheques, that have either been altogether stolen and then cashed, or altering a cheque that has been legitimately written to the perpetrator, by adding words and/or digits in order to inflate the amount.
Other cases involved the use of completely fake cheques, as in the case of Frank Abagnale
Frank Abagnale
Frank William Abagnale, Jr. is an American security consultant known for his history as a former confidence trickster, check forger, impostor, and escape artist...
. The perpetrator passes or attempts to pass a cheque that has been manufactured by him/herself, but that represents a non-existent account.
Unusual cases
For example, disappearing ink has been used to commit a rare form of fraud. In such cases, the perpetrator chemically alters the substance so that it disappears in several hours or days rather than a few minutes. The individual then writes a cheque to him/herself (or a partner in the scheme) using Bank A's account for a specified amount, say, $5100. In this amount, the digit 5 is written with the disappearing ink, and the remainder of the amount in regular ink. The cheque will be deposited in Bank B's account, where $5100 will be added, but by the time it reaches Bank A for clearance, the cheque will then read $100, and only $100 will be debited from that account."Cheque washing
Check washing
Check washing is the process of erasing details from checks to allow them to be rewritten, usually for criminal purposes such as fraudulent withdrawal from the victim's bank account. The technique could potentially be used to remove ink stains from books....
" involves the theft of a cheque in transit between the writer and recipient, followed by the use of chemicals to remove the ink representing all parts other than the signature. The perpetrator then fills in the blanks to his or her advantage.
Sometimes the cheque fraud comes from an employee of the bank itself, as was the case with Suzette A. Brock, who was convicted of theft for writing five corporate cheques to her own birth name from her desk as a loan servicing agent for Banner Bank of Walla Walla, WA.
The most notorious "bad cheque artist" of the 20th century, Frank Abagnale
Frank Abagnale
Frank William Abagnale, Jr. is an American security consultant known for his history as a former confidence trickster, check forger, impostor, and escape artist...
, devised a scheme to put incorrect MICR numbers at the bottom of the cheque he wrote, so that they would be routed to the incorrect Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
for clearing. This allowed him to work longer in one area before his criminal activity was detected.
Combating cheque fraud
In most jurisdictions, passing a chequeCheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
for an amount of money the writer knows is not in the account at the time of negotiation (or available for overdraft protection) is usually considered a violation of criminal law
Criminal law
Criminal law, is the body of law that relates to crime. It might be defined as the body of rules that defines conduct that is not allowed because it is held to threaten, harm or endanger the safety and welfare of people, and that sets out the punishment to be imposed on people who do not obey...
. However, the general practice followed by banks has been to refrain from prosecuting cheque writers if the cheque reaches the bank after sufficient funds have been deposited, thereby allowing it to clear. But the account holder is normally held fully liable for all bank penalties, civil penalties, and criminal charges allowable by law in the event the cheque does not clear the bank.
Only when the successful clearance of a cheque is due to a kiting scheme does the bank traditionally take action. Banks have always had various methods of detecting kiting schemes and stopping them in the act. Computer systems in place will alert bank officials when a customer engages in various suspicious activities, including frequently depositing cheques bearing the same, large monthly total deposits accompanied by near-zero average daily balances, or avoidance of tellers by frequent use of ATMs for deposits.
New technology in place today may make most forms of cheque kiting and paper hanging a thing of the past. As new software rapidly catches illegal activity at the teller/branch level instead of waiting for the nightly runs to the back office, schemes are not only easier to detect, but may be prevented by tellers who deny customers illegal transactions before they are even started.
Before the passage of the Check Clearing for the 21st Century Act
Check 21 Act
The Check Clearing for the 21st Century Act is a United States federal law, , that was enacted on October 28, 2003 by the 108th Congress. The Check 21 Act took effect one year later on October 28, 2004...
, when cheques could take 3 or more days to clear, playing the float was fairly common practice in otherwise-honest individuals who encountered emergencies right before payday.
Circular and abandonment frauds are gradually being eliminated as cheques will clear in Bank B the same day they are deposited into Bank A, giving no time at all for non-existent funds to become available for withdrawal. With image-sharing technology, the funds that temporarily become available in Bank A's account are wiped out the same day.
While there may still be some room for retail kiting, security measures taken by retail chains are helping reduce such incidents. Increasingly, more chains are limiting the amount of cash back received, the number of times cash back can be offered in a week or a given period of time, and obtaining transactional account balances before offering cash back, thereby denying it to those with low balances. For example, Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
's policy is to determine account balances of those obtaining cash back, and some Safeway
Safeway Inc.
Safeway Inc. , a Fortune 500 company, is North America's second largest supermarket chain after The Kroger Co., with, as of December 2010, 1,694 stores located throughout the western and central United States and western Canada. It also operates some stores in the Mid-Atlantic region of the Eastern...
locations will not offer cash back on any accounts with balances under $250, even when funds are sufficient to cover the amount on the cheque. Customers who are noted to obtain cash back frequently are also investigated by the corporation to observe patterns.
Some businesses will also use the cheque strictly as an informational device to automatically debit funds from the account, and will return the item to the customer thereafter. However, in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
this is done through the Automated Clearing House
Automated Clearing House
Automated Clearing House is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments...
(ACH); though faster than traditional cheque clearing, contrary to popular belief the ACH is not instantaneous. Though this practice reduces the room for kiting (by reducing float), it does not always eliminate it.
See also
- Advance-fee fraud
- Bad Check Restitution ProgramBad Check Restitution ProgramA bad check restitution program is a program that works to retrieve funds from bad check writers in order to repay moneys owed to the recipients of the checks. These programs are run by prosecutors in jurisdictions across the country....
- Bank fraudBank fraudBank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently representing to be a bank or financial institution. In many instances, bank fraud is a criminal offense...
- ChexSystemsChexSystemsChexSystems is an eFunds check verification service and consumer credit reporting agency like Experian, Equifax and TransUnion. While most credit reporting agencies broker data about how a consumer handles credit relationships, ChexSystems provides data related to how a consumer has handled deposit...
- Federal Bureau of InvestigationFederal Bureau of InvestigationThe Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...
- House banking scandalHouse banking scandalThe House banking scandal broke in early 1992, when it was revealed that the United States House of Representatives allowed members to overdraw their House checking accounts without risk of being penalized by the House bank ....
- Job kiting, named by analogy
- United States Secret ServiceUnited States Secret ServiceThe United States Secret Service is a United States federal law enforcement agency that is part of the United States Department of Homeland Security. The sworn members are divided among the Special Agents and the Uniformed Division. Until March 1, 2003, the Service was part of the United States...
- White-collar crimeWhite-collar crimeWithin the field of criminology, white-collar crime has been defined by Edwin Sutherland as "a crime committed by a person of respectability and high social status in the course of his occupation" . Sutherland was a proponent of Symbolic Interactionism, and believed that criminal behavior was...
External links
- National Check Fraud Center - a description of laws in all 50 U.S. states.