Kiting is an illegal way for people to obtain unauthorized credits in their bank accounts by employing dishonest methods like issuing a negotiable financial instrument without having enough bank balance, stating a false amount or date, or lying about previously obtained credit financing in order to get more money.
It might entail writing checks with a low bank balance, or someone with two accounts could use one to write a check to the other to pay off debts and clear the balance in the first bank. On the second day, he writes a check in the first bank's favor, establishing a virtual bank balance.
This cycle keeps going until the offender is apprehended. When any securities firm flouts regulatory authorities' three-day settlement deadlines or fails to honor the settlement of a buying-selling transaction, it involves banking financial instruments and can also be done on securities.
A firm must purchase securities from the open market to complete the deal if it does not obtain securities during the settlement period. Such firms will be charged with a delinquent act of kiting if they purposefully neglect to purchase short securities.
Depending on the size of the bank/FI and the degree of fraud, the effects of check-kiting may be modest or serious. The bank may not suspend the kiter's account if the lost money is found. Nonetheless, it can deny clients access to benefits like processing ATM withdrawals or deposits of personal checks.
While in some circumstances, the bank/FI may choose to suspend the account and notify the agency for checking accounts of the fraudulent check-kiter activity. Let's say a kiter has a negative report from an agency. They are not permitted to open any further current or savings accounts in that situation. Routine tasks like processing employee salaries and purchasing commodities, among others, may become challenging. While they may also face criminal charges and be imprisoned in cases of serious fraud.
Although it is exceedingly challenging for a financial institution to uncover such a scam, after identifying any potential kiters, one must carefully watch transactions. Some of the procedures and checks that can be used to spot kiting frauds are listed below:
- There should be a reliable system in place for alert management to identify anyone who is suspected of kiting.
- After identifying suspects, one should keep a tight eye on their transactions in order to spot and stop any potential fraud.
To confirm that funds are available within accounts maintained by a suspectable kiter at their bank, banks and financial institutions should get in touch with and inquire with other banks and financial institutions about the types of transactions carried out by suspected kiters. They should also determine whether or not funds are available to the other institution.
Never accuse anyone involved in kiteboarding before the truth is fully established.
Penalties that one may impose may differ according to the cost of the kited transaction. For instance, a kiter may lose some of the rights and advantages connected to the accounts if they engage in a minor act of kiting for which money is later recovered by banks or FI.
Banks may utilize alternative methods or procedures to collect the defaulted amount in situations where money may not be recouped. In addition to recovery, a person may also be subject to other financial (cash or non-cash) penalties, such as suspension of kept accounts.
Moreover, banks and financial institutions may submit reports to ChexSystems, a credit rating company. Let's say there are negative reports regarding the kiter in this agency already. In that situation, depending on the fraud involved, it may impose limitations on opening future savings or accounts for a specific time or indefinitely.
To get unlawful credits in bank accounts or to prevent a certain debit impact, kiting is the criminal use of banking financial instruments. A check, securities, and retail kiting might all be involved. To spot and stop a kiting transaction, specific checks and monitoring systems must be put in place. Depending on the type and value of the offender's transactions, different consequences and fines apply. Also, it mostly impacts the banking and financing sectors.