By Maria S. Hamernik, CFE, CPA
John the controller tried to buy a little time with a check kiting scheme to keep two businesses alive. Unfortunately for him, the time he bought was 10 months in prison.
If you ask someone the definition of check kiting, they often look at you with a blank stare and say, "Yeah, I know what that means. It has something to do with bank accounts." But you can tell they don't really understand. Even when you try to explain that it has to do with checks being written between bank accounts to artificially inflate bank balances, you usually get a response of, "Oh, now I know what you're talking about." But you can still tell that they're not clear on the concept. Actually, many prosecutors aren't either and that makes them less likely to pursue check kiting prosecutions.
According to the ACFE Fraud Examiners Manual, check kiting is defined as the process in which cash is recorded in more than one bank account, but in reality the cash is either nonexistent or is in transit. Kiting schemes can be perpetrated using one bank and more than one account or between several banks and different accounts.
Find the float
A check kiting analysis is a labor-intensive investigation. The investigator must look at 100 percent of the deposits and deposited items during at least three months of the suspected period. This time is sufficient to determine whether a kite pattern exists. If the kite wasn't sustained for a full three months, a shorter analysis period may be used. The key is to determine whether the deposited funds originated from a legitimate third-party source or if they were from another bank account of the subject or under the subject's control. It's also necessary to document the date of the deposit of the check and also the date that the check cleared the originating bank. This difference between the deposit date and the check-clearing date is the float period. (That float time is now greatly reduced due to Check 21. See sidebar below.)
In the United States, check kites are prosecuted under Title 18, U.S. Code Section 1344, which is defined as obtaining the funds of a federal bank under false pretenses. In effect, a check kite is obtaining an interest-free loan from a bank without the bank's knowledge. One of the challenges of check kiting investigations is proving intent; it must be proved that the fraud occurred by design and wasn't due to an accident, mistake, or bad business decision. Intent can be proved through establishing the pattern of the check kite - the consistent movement of checks among bank accounts without any purpose other than to inflate bank balances. When performing a check kite analysis it's also necessary to look at the withdrawal side of the bank accounts because one of the first things a prosecutor asks is, "Well, why did he do it?" Obviously, you need to answer this question. Maybe it was a cash flow problem or the subject purchased expensive assets or went on extorbitant trips.
It's up to the fraud examiner to simplify the check kiting investigation by providing a clear-cut analysis with eye-catching exhibits and to make the check kiting definitions easily explainable to both prosecutors and potential juries. Following is an example of an actual check kiting investigation performed by the Federal Bureau of Investigation. The names have been changed, but the basic facts of the case remain the same.
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