A cheque kiting scheme generates non-existent revenue and produces questionable account balances by taking advantage of the clearing period for a cheque, known as the ‘float period’. According to the Association of Certified Fraud Examiners (ACFE), cheque kiting is a process whereby cash is recorded in more than one account, but in reality the cash is either non-existent or in transit.

Cheque kiting is a significant problem in the US where there is no clearing period following presentation of a cheque and often a lack of communication between different states and banking institutions.

One recent cheque kiting case cost the US approximately $82 million alone, when Mr Khan, “the Deli King of Staten Island”, wrote $82 million in useless cheques over a two-week period and he later pled guilty to cheque fraud in May 2013.

Mr Khan took advantage of the ability for customers to go overdrawn on their accounts temporarily, exposing obvious flaws in the security of the US banking system.

In order to start a cheque kiting scam the typical cheque kiter opens two or more chequeing accounts at two or more different banks. Assume Mr Kiter opens two accounts and deposits $250 into each account. He then writes a cheque for $250 against his first account and deposits it into his second account. Before Bank A is aware that the cheque has been written, Mr. Kiter deposits a $500 cheque from his Bank B account into the Bank A account. The scheme is completed when Mr Kiter cashes a cheque for a non-existent $750 that he wrote against his Bank A account into his Bank B account. This process is summarised in the diagram below.

Financial institutions are most at risk of this type of fraud, namely banks. Financial institutions should be aware of the potential warning signs and procedures to have in place to minimise risk. These include, but are not limited to, several accounts held in similar names, owned or controlled by the same individual, regular or excessive drawings against un-cleared funds, frequent transactional patterns with similar or increasing balances, and a volume of activity that is inappropriate in relation to the nature of the business of the account involved may be evidence that cheque fraud is being committed.

Prevention is better than cure. Financial institutions should run daily reports against all drafts and un-cleared funds to minimise their potential risk. There are also reporting systems that can be purchased to identify irregular conduct and pinpoint when a kite could be occurring. In addition, implementing a mandatory clearing period where un-cleared funds cannot be accessed in that time would assist in reducing this problem.

KRyS Global, a fraud investigation and asset recovery firm based in Bermuda, wrote this article as a way to increase community awareness about fraud. For more information contact Mathew Clingerman, managing director, KRyS Global at Mathew.Clingerman@krys-global.com