Anatomy of check-kiting fraud
By Laura Bruce • Bankrate.com

Kiting isn't the most popular type of deposit fraud. In fact, it happens with far less frequency than typical deposit fraud, but it can be far more devastating to the bank.

"Other fraud is like a thunderstorm; kiting is a tornado," says Sydney Hicks of Sterling Commerce banking systems division.

Here's how it works. Suppose you have $10 in bank A but you write a check on the account for $500 and deposit it in bank B. Before that deposit can be processed, you go back and tell the teller at bank B that you want to withdraw $400. The teller gives you $400 in cash, and you disappear before the check bounces.

That's a very simple kite. More often it's a bit more sophisticated and involves a lot of money. Check kiting requires at least two accounts, and very often involves two or even three banks. The money rotates in a complete circular fashion between accounts.

Hicks says a kite can take down a financial institution.

"A small credit union in northern Illinois took a $4 million kite loss and had to close its doors. Within the last five to seven years we've seen kites in excess of $10 million to $20 million."

Dedicated fraudsters are often responsible for the high dollar check kiting schemes, but regular customers do much of the smaller kiting that goes on.

"Kiting happens on a daily basis at just about every financial institution," according to Young. "It may be a customer with a longtime relationship or a new customer. Most kiting occurs with individuals that have businesses that don't have enough income or revenue to keep going.

"They supplement with check kiting. I think they have every intention to make everything good, but if the money doesn't come in the situation gets worse and worse. Others do it to run up the dollars and get out of Dodge and leave one of the banks holding the bag."

There's never anything accidental about a kiting scheme, says Robert Young, loss prevention manager at Regions Bank in Birmingham, Ala.

"There's too much manipulation of the float and timing. A person who kites well never has returned deposit items or notice of nonsufficient funds. They're always covering a bad item with a bad item with a bad item."

Tom Vleisides of Carreker, says his company has software aimed at detecting kite frauds.

"We look at a 60- to 90-day window. It's a detailed analysis with graphs. You can tell a kite from four feet away. We look at uncollected funds and the usage of uncollected funds. Under normal situations you won't have a parallel set of numbers going on there.

"Your deposit goes in, there are uncollected funds for a couple of days, then it goes to fully collected. There's no pattern. With a kite the bad guy has to know how long it will take to clear and has to really manage and control that. Otherwise the kite falls apart."

Shutting down a kite involving multiple banks takes teamwork so no bank is left holding the bag.

"If you say, 'I'll shut down this kite,' you force another institution to take a loss," says Vleisides. "You want to identify the other bank or banks and tell them you think there's kite. When all the banks involved agree, they shut down the accounts all at the same time. No one takes a loss because you haven't allowed the guy to come into the bank and take the money out."

-- Posted: Dec. 3, 2002