Kiting 101: understanding the concept and protecting yourself from its impact

To have a debt excepted from discharge due to fraud in a credit card kiting scheme the debtor must have been acting with the intent to not repay the debt as evidenced by the totality of the circumstances. Subsequent conduct can show the debtor’s state of mind and whether he intended to repay the debt or not. Kiting in finance refers to the act of kiting credit cards leveraging a low or zero balance in your account by writing checks or drawing drafts from accounts with insufficient funds.

• This includes monitoring frequent balance transfers, denying excessive credit applications, and establishing stricter verification processes.
• We will cover the necessary steps to take, including contacting your bank, filing a report with the authorities, and potentially hiring a professional investigator to help resolve the situation.
• Through understanding and careful management, credit cards can become a potent tool in your financial arsenal.
• Our mission is to empower you with the tools and knowledge you need to make informed decisions, understand intricate financial concepts, and stay ahead in an ever-evolving market.
• The practice has been facilitated by the ease of obtaining credit lines, the length of grace periods, and the capacity for balance transfers.
• In this case, the kiter is creating cash while avoiding legally entitled cash advance fees.

Individual Tax Forms

The scandal brought about a new wave of accounting laws, most notably the Sarbanes-Oxley Act, to prevent the same behavior in the future. One of the most famous institutional downfalls in recent history is the Enron scandal. The energy-trading company overstated the company’s earnings to shareholders, essentially “kiting” the value of the organization and defrauding investors. Sometimes it just takes one bad actor to ruin the financial security of many, but in Enron’s case, thousands of lives were ruined, and its leadership team was complicit at best. Many bust-out schemes are not done by a sole individual but rather large crime rings involving many people to take as much advantage of financial institutions as they can.

Legal Implications of Credit Card Stacking

It’s also important that lawmakers directly attack kiting with new regulations nationwide. One such piece of legislation – Check 21 – was written to prevent kiting, but with new weaknesses to exploit, more legislation is needed. A bust-out consists of an initial phase where the individual works to develop the card issuer’s trust and a strong credit profile with the goal of opening numerous accounts and receiving credit line increases. Once this occurs, more funds are available for the second phase of the fraud, where the individual makes transactions that they don’t plan to repay. Kiting can create significant losses for banks, as they may process fraudulent checks and provide funds that do not actually exist.

How Ram Simplified His Study Process and Passed the CPA Exams

Both practices exploit the delay in transaction processing but use different financial instruments. With new technologies such as artificial intelligence and machine learning embedded into their banking ecosystem, financial institutions can flag potential fraud automatically. By watching for suspicious behavior like regular overdrafts, a high volume of deposits and withdrawals, or regular use of multiple bank accounts, banks can prevent kiting better than ever. Thanks to digital banking and other tools, financial institutions have reduced float time and gotten better at preventing kiting before it gets out of hand. But, at the same time that victims of kiting are getting better at preventing it, perpetrators are evolving, too. Scammers can now move funds between bank accounts with a few clicks, vastly improving the speed at which they can commit financial fraud.

How To Prevent?

In some cases, if the funds are unrecoverable, financial institutions may have to write off the theft as an expense, absorbing most of the financial impact. By continually repeating this process, John can give the illusion that he has more money in his accounts than he truly does, while the checks are in the process of being cleared. Wanted to edit in that in this day and age, Cash in this post doesn’t have to mean physical cash. Payment works just as well (maybe better) as long as it’s the type that incurs no fees. In 2009, a well-known case of kiting involving a major financial institution resulted in significant damage to the organization’s credit scores and reputation. BankersOnline is a free service made possible by the generous support of our advertisers and sponsors.

• Essentially, it is a scheme where cash is recorded in more than one bank account, but in reality, is either non-existent or is in transit.
• The scandal brought about a new wave of accounting laws, most notably the Sarbanes-Oxley Act, to prevent the same behavior in the future.
• With new technologies such as artificial intelligence and machine learning embedded into their banking ecosystem, financial institutions can flag potential fraud automatically.
• It is up to the banks to detect the practice and when necessary, stop it.
• Kiting or check-kiting covers a lousy check from one bank account to another.
• This dishonest practice can temporarily inflate the account balance, helping to conceal fraudulent financial activities like embezzlement or to extend credit unlawfully.

The money gets sent to his girlfriend and charges to his credit card, usually for a small fee. His girlfriend then writes him a check for the amount he sent her, he deposits it and uses the funds to help pay the minimums every month. Apparently it’s allowed him to avoid any late payments, which is helping him to stay in reasonable standing with the banks despite the amount he owes. Check kiting involves floating checks between bank accounts at different banks to make use of the clearing time.

Loss of Financial Stability

I would hope the business was affected by a one-off catastrophic event and was not intentionally trading beyond the point of insolvency as that can be a problem as well. So you would defend against a fraud claim by showing you really did spend 4 hours/day seeking employ, and averaged 6 job interviews a week, and these jobs would let you realistically live and pay down the debt. These are getting harder to find, but if you have some who do a significant amount of spending with cash, offer to put their purchases on your cards and accept the cash instead. If you really trust them (be careful) you can add them as an authorized user so you don’t have to be present all the time. While not the same, kiting can sometimes be likened to Ponzi schemes due to the reliance on continuous and unsustainable inflow/resource leveraging to cover obligations. End-to-end B2B payment protection software to mitigate the risk of payment error, fraud and cyber-crime.

In some cases, it may also be called playing the float or paper hanging. Regardless of the term used, all forms of check fraud are illegal and can have serious consequences. Banks have strict measures in place to detect kiting, such as monitoring for unusually high numbers of checks being written or deposited, as well as tracking account balances and check clearing times. Are you interested in understanding the concept of kiting and its implications? This article delves into the meaning and significance of kiting, addressing any confusion or questions you may have. In today’s fast-paced world, financial frauds such as kiting have become a major concern, making it crucial to be well-informed about such practices.