                         CHECK KITING
            DETECTION, PROSECUTION, AND PREVENTION

                              By

              Johnny S. Turner, Jr., M.S., C.P.A.
                         Special Agent
              FBI's Provo, Utah, Resident Agency
                              and
                W. Steve Albrecht, Ph.D, C.P.A.
                    Certified Fraud Examiner
                            Director
          School of Accountancy and Information Systems
                    Brigham Young University
                      Salt Lake City, Utah


     Dennis Greer (not his real name) was struggling financially.
After using a $1,000 inheritance to secure an unfurnished
apartment, he supported himself with a minimum-wage job that
barely covered his living expenses.

     With no family members or friends to turn to for assistance,
and instead of seeking help through legal channels, Greer
committed a fraud known as check kiting. That is, he wrote checks
on one bank when there were insufficient funds in his account to
cover them. To conceal the fraud, he made deposits using checks
drawn on a second bank, where he maintained an account but had no
money in it. The last bank to catch the fraud lost over $40,000
in less than 2 months.

     Greer's kite was small compared to other kiting schemes. For
example, in 1988, two individuals in New York City kited between
two prominent banks. Their kite involved 15,000 checks totaling
$2 billion. In another case, almost 20 banks lost over $2
million, while the perpetrator's "friends" lost $19 million.

     Difficult to detect and prosecute, check kiting schemes have
gained popularity in recent years. In response, more banks focus
on recognizing the signs of kiting. As a result, check kiting
schemes are being discovered and reported more frequently today
than ever before. In fact, the number of cases reported to the
FBI's Financial Institution Fraud Unit at FBI Headquarters in
Washington, DC, has doubled in the past 4 years.

     In order to prosecute these cases successfully, the FBI
developed the Check Kite Analysis System (CKAS), (1) a computer
program that helps law enforcement agencies to reduce the
complexity of investigating kiting schemes and to prove the
perpetrator's intent to defraud. This article defines check
kiting, describes detection methods, and explains how the FBI
uses the CKAS to prosecute kiters successfully. Finally, it
advises how financial institutions can stop kiting schemes before
they start.
CHECK KITING DEFINED

     Check kiting is a systematic pattern of depositing
nonsufficient funds (NSF) checks between two or more banks,
resulting in the books and records of those banks showing
inflated balances that permit these NSF checks to be honored
rather than returned unpaid. In addition, other checks and
withdrawals may be honored against these inflated balances,
resulting in actual negative balances, to the extent that banks
allow withdrawal of uncollected funds. Put simply, check kiting
is accomplished by taking advantage of the float--that is, the
time required for a check deposited in one bank to be physically
presented for payment at the bank on which it was drawn.    

     Check kiting goes beyond check swapping, which involves
merely exchanging checks between two or more bank accounts. When
individuals devise check swapping schemes in order to create
bragging rights to large account balances, they usually need not
fear prosecution because the potential loss from one bank is
offset by a matching inflated balance in another. Upon discovery,
cooperating banks resolve the problem by returning the checks
unpaid and eliminating artificially inflated balances among
themselves. However, when individuals knowingly write checks
against these balances to pay for purchases or other expenditures
to third parties, they are committing a prosecutable offense
known as check kiting.

METHODS OF DETECTION

     Law enforcement officials need the cooperation of financial
institutions in order to identify and prosecute check kiters.
Obviously, banks benefit from early detection. For this reason,
most banks have made efforts to discover such schemes before
experiencing a loss. Traditionally, banks use some variation of
what is commonly called a kiting suspect report, a standard form
that is computer-generated by virtually all banks.

     These reports work because kiting is almost always
associated with the same warning signals. Even the most clever
kiter cannot hide the signs that can accurately signal kiting
activity. Together, these signals comprise the acronym "SAFE
BANK":

     o    Signature and payee on kited checks are often the same

     o    Area abnormalities (many out-of-area checks)

     o    Frequent deposits, check writing, and balance inquiries

     o    Escalating balances

     o    Bank abnormalities (deposited checks are usually drawn
          on the same banks)

     o    Average length of time money remains in account is
          short

     o    NSF (frequent NSF problems)

     o    Keep banks from recognizing frequency of transactions
          by using ATM, night drop, drive up, and other branches
          for deposits and withdrawals. 

     The first kiting signal, signature and payee the same, is an
indicator most often associated with cases involving a single
perpetrator. Kiters working alone often use two or more types of
accounts--such as personal, custodial, or business--and kite
among them. In addition, to avoid suspicion, kiters may make a
memo entry at the bottom of checks to provide justification for
the increasingly large amounts of the checks. One kiter, for
example, wrote checks to himself with memo entries for a trip to
Spain and for the purchase of furniture, a car, and even a
forklift. Such actions should raise a red flag to bank officials,
as individuals rarely make checks out to themselves when making
purchases--they write checks payable to the merchant.

     The second signal, area abnormalities, is very common,
because kiters want to allow as much float time as possible. As a
result, they often use banks in different cities or regions of
the country. Therefore, bank authorities should question
excessive or unnecessary use of out-of-town banks.

     The third indicator, frequent deposits, check writing, and
balance inquiries, is perhaps the most telling sign of kiting. In
order to cover themselves, kiters make frequent deposits and
write numerous checks. They inquire about their bank balances
often in order to understand float times and to determine whether
there is "money" in their accounts to support checks.

     Fourth, escalating balances also signal check kiting.
Because each check must be large enough to cover the one written
before it, account balances usually grow very quickly. In one
case, the bank lost $1.5 million in just over a month. In
another, an individual who listed his job status as "unemployed"
opened an account with $10, kiting it to over $45,000 in just 2
months.

     The fifth signal, bank abnormalities, means that check
kiters usually make deposits with checks drawn on the same bank.
In conducting normal business or other transactions, it is highly
unlikely that all checks being deposited will be from the same
few banks. Therefore, authorities should be wary of such
deposits, suspecting kiting as the motivation for them.

     For example, one $2 million kite was detected when a kiter
made a deposit that included numerous checks, all drawn on the
same bank in which the deposit was being made. When the kiter
realized he had deposited the wrong bag, he telephoned the bank
and brought a substitute bag full of checks for deposit. The
substitute deposit included a large number of checks, all drawn
on another bank.

     Many banks use the sixth signal--the average length of time
money remains in an account--to determine if deposits are
immediately being withdrawn. Because this may signal a kiter's
taking advantage of float times, most kiting suspect reports
highlight accounts where money stays in the account an average of
less than 2 or 3 days.

     NSF activity, the seventh signal, may or may not be present
in kiting. When balances escalate dramatically, as often happens,
there may be no NSF activity. Professional kiters usually
understand Federal banking regulations well enough to know how
long checks and deposits take to clear. However, amateur kiters
often "bounce" checks because of their lack of knowledge of
clearing times.

     Finally, signal eight, using alternative deposit and
withdrawal methods in an effort to avoid detection, is a good
predictor of kiting. Unfortunately, this activity is often
difficult to monitor, because most kiters avoid entering the same
bank branch several times a day. Instead, they use drive-up
windows, other branches, night drops, automatic teller machines,
and other alternative access methods to avoid suspicion.

     Banks must take full advantage of these eight signals to
detect check kiting activity accurately. Kiting suspect reports
should be distributed daily, and if they signal a potential kite,
checks and deposits should be pulled and other kiting indicators
in the "SAFE BANK" checklist investigated.

THE CHECK KITE ANALYSIS SYSTEM 

     Historically, check kiting has been difficult to prosecute.
This is due to its complexity, the number of documents involved,
and the difficulty in proving the perpetrator's intent to
defraud. However, in 1989, the FBI developed the CKAS, which uses
the RBASE database software package. The CKAS has been used
successfully in dozens of bank fraud cases and has, thus far,
withstood all challenges in jury trials. 

     Investigators working suspected check kiting cases should
secure--through proper legal channels--copies of checks, deposit
slips, and bank statements from all the accounts they believe the
suspect is using. While these documents will be used to
substantiate the case, the bank statements alone should contain
all the information needed to determine if kiting has occurred
and whether a particular offense is prosecutable.

     Investigators need only enter the date each check was
deposited, the check amount, and the date the check cleared the
issuing bank. The CKAS program then calculates the length of time
each check spends in float, and in turn, the amount of money in
float. Therefore, by subtracting the amount in float from the
bank's perceived balance, the CKAS determines the true account
balance, whether positive or negative.

     Whether the kite involves 2 accounts or 20, the CKAS looks
at the combined effect on the banks affected by the kite. That
is, even if 2 or 3 banks out of a total of 10 being used show
negative actual balances, and thus potential losses, sufficient
funds may exist in the other banks to cover the floated checks.
In this case, then, there would be no loss to the banking system,
although individual banks may show losses because of "forced
interest-free loans." Loss of revenue alone, however, does not
usually meet the intent-to-defraud criteria required for criminal
conviction. In order for this to occur, the combined banking
system must suffer a loss, either real or potential, resulting
from the kiter's use of falsely inflated balances.

PREVENTING KITING

     An unwritten rule of etiquette seems to exist among bankers
regarding what they can ask about a deposit and when they can
place holds. In an effort to prevent kiting, some geographical
banking areas have adopted restricted policies regarding
depositors' use of uncollected funds. They also place holds on
deposits for the maximum time limit allowed by Federal
regulations. However, in other geographical areas, depositers
receive immediate credit for all deposits, and kites can be more
easily perpetrated.

     While, ultimately, only banks themselves can prevent check
kiting from occurring, law enforcement officers can help by
encouraging banks to place restrictions on deposits. If banks are
not willing to restrict access to funds on all deposits, they
should learn and carefully monitor the eight kiting signals and
restrict access in questionable accounts.

     Deciding when to deny immediate access to funds is a
cost/benefit tradeoff between customer service and kiting losses.
Banks that fear offending or losing customers may learn the hard
way that failure to place holds on accounts and/or monitor kiting
systems places them at high levels of risk.

CONCLUSION

     Check kiting is on the increase, both in terms of the number
of incidents and dollars lost. However, banks can prevent losses
by denying immediate access to deposited funds and by attempting
to identify the "SAFE BANK" indicators of kiting. When possible,
law enforcement personnel should encourage financial institutions
to take such actions.

     When kiting does occur, active prosecution should take
place. Using the CKAS, the FBI has successfully obtained criminal
convictions of check kiters. As a result, fear of criminal
prosecution now faces kiters whose predecessors relied upon the
complexity of their schemes to discourage overwhelmed
investigators and prosecutors. When properly understood, however,
kiting can be detected, prosecuted, and prevented.


ENDNOTE

     (1)  Special Agent Johnny Turner, Provo, Utah, Resident
Agency, and Special Agent Daniel D. Dubree, New York City Field
Office, developed the Check Kite Analysis System, in conjunction
with the Technical Services Division, FBI Headquarters,
Washington, DC. Law enforcement agencies interested in the Check
Kite Analysis System may contact the nearest FBI field office.

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