Check Kiting Research Paper

Check kiting is an illegal practice that takes advantage of the time it takes checks to clear the payment system. This time, known as float, allows the “check kiter” use of nonexistent funds. Kiting can lead to enormous account balances on paper – and a loss for the credit union when the kite eventually collapses. In fact, check kiting is considered the largest loss exposure associated with any share draft/checking account program. Losses from check kiting can threaten the solvency of a credit union as the losses can be in the millions of dollars.
Both consumers and businesses have been guilty of check kiting schemes. The primary reason cited in kiting cases is financial difficulty leading to poor cash flow. In order to pay their bills, they resort to check kiting. The consumer or business inflates their checking account balance with nonexistent funds for writing checks against the account. Business kiting schemes generally result in the largest losses. …show more content…
With checks clearing faster today because of Check 21, Kiters must work even harder to maintain their kiting schemes.
KITING DEFENSES
The best defense against any check fraud scheme, including kiting, is the “check hold.” Federal Reserve Regulation CC (Reg CC) allows an exception hold when a credit union has suspicions of check kiting. This exception falls under the category ‘Reasonable Cause to Doubt Collectability’, and allows a seven-business day hold on suspicious checks deposited by the member. A check hold prevents checks written by the member from clearing against uncollected funds. These checks will be returned unpaid to the other financial institution and the kite (and loss) will fall on that institution.
When invoking the exception hold, Reasonable Cause to Doubt Collectability, requires the credit union to provide an exception hold notice to the member indicating the reason for the hold. If this exception