Understanding Kiting: Fraudulent Checks and Securities Explained

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Kiting is a form of financial fraud in which someone uses checks or securities transactions to obtain credit they are not entitled to by exploiting the delay between when a transaction is recorded and when it actually settles. In its classic form, check kiting, a person moves worthless checks between two or more bank accounts so that each account appears funded by a deposit that has not yet cleared. The “credit” is really the bank’s money, made available during the float period.

How check kiting works

When a check is deposited, the receiving bank often credits the account before the paying bank has confirmed that the money exists. That window is the float. A kiter opens accounts at two or more institutions and writes a check on one account to deposit into the other. Before the first check reaches the paying bank, the kiter writes another check in the opposite direction to cover it, then repeats the cycle.

Each check is covered only by another uncleared check, so the balances on both accounts can grow far beyond any real deposits, and the kiter withdraws cash or spends against them. The scheme lasts only while new checks keep arriving ahead of the ones that would bounce. Once one check is returned unpaid, the chain collapses and at least one bank absorbs the loss.

Worked example (hypothetical)

Assume a person has $200 at Bank A and $100 at Bank B, and that each bank makes deposits available before the check clears.

1. Day 1: She writes a $3,000 check on Bank B and deposits it at Bank A. Bank A shows $3,200 available.
2. Day 1: She withdraws $2,500 in cash from Bank A.
3. Day 2: Before the Bank B check is presented, she writes a $3,500 check on Bank A and deposits it at Bank B, so Bank B can now pay the $3,000 check when it arrives.
4. Day 3 onward: She keeps alternating larger checks to cover the previous ones.

Only $300 of real money ever existed. The $2,500 withdrawn came from Bank A’s funds on the strength of a check backed by nothing, and when the cycle stops, the most recent check bounces.

Retail kiting

Retail kiting applies the same timing trick at a store instead of a second bank. The person writes a check for a purchase from an account without sufficient funds and relies on the delay before the store’s bank presents it. Where a retailer offers cash back on check purchases, the scheme extracts cash as well as merchandise, and some variations return goods bought with a bad check for a cash refund before the check is returned. The losses fall on the retailer or its bank.

Securities kiting

In securities markets, kiting abuses the settlement cycle rather than check clearing. U.S. trades settled in three business days (T+3) for many years, then T+2, and moved to one business day (T+1) in 2024. A firm that does not deliver securities by settlement has a “fail to deliver.”

Under SEC Regulation SHO, Rule 204 (17 CFR 242.204), clearing participants must close out fail-to-deliver positions within set deadlines, typically by buying or borrowing the securities. A firm that ignores this, keeps an effective short position open, repeatedly delays delivery or arranges transactions to avoid proper settlement is treated as kiting: it obtains credit from its counterparties by holding the proceeds or position without supplying the securities.

Kiting in auditing

In accounting and audit work, kiting usually means cash kiting within a company. Near the end of a reporting period, an employee transfers money from one company bank account to another. The receiving account records the deposit in the current period, while the disbursement from the sending account is not recorded until the next period. For a short time the same cash appears in both accounts, overstating cash on the balance sheet, which can hide a shortage or a misappropriation.

Auditors look for this with a bank transfer schedule, which lists transfers around year-end with the dates each one was recorded in the books and cleared by each bank. They also review cutoff bank statements covering the days after period end. A transfer recorded as received in one period but disbursed in the next is a standard red flag.

Kiting vs. related schemes

• Lapping: An employee steals one customer’s payment and covers it by applying a later customer’s payment to the first account, and so on. Lapping hides stolen receivables, while kiting inflates cash or credit through float. Auditors often test for both because each depends on timing gaps.
• A bounced check: A single check that overdraws an account, by mistake or not, is not kiting by itself. Kiting requires a deliberate cycle of checks designed to create balances that do not exist.
• Overdraft or line of credit: These are credit the bank has agreed to extend. Kiting obtains credit without the bank’s consent.
• Kite flying: An older term, common in British usage, for raising money on worthless bills or checks. It describes the same idea.

Legal consequences

Check kiting is fraud. In the United States it can be prosecuted under the federal bank fraud statute (18 U.S.C. § 1344) as well as state laws on bad checks and theft. Securities kiting can lead to regulatory action for violating settlement and close-out rules. Cash kiting inside a company can amount to financial statement fraud or embezzlement.

Why kiting is harder today

Several changes have shrunk the float that kiting depends on. The Check 21 Act of 2004 allowed banks to clear checks as electronic images instead of shipping paper, cutting clearing times sharply. Regulation CC, which implements the Expedited Funds Availability Act, sets how long banks may hold deposited funds and allows longer holds on large or unusual deposits and on new accounts. Banks also run software that flags kiting’s signature pattern: frequent deposits and withdrawals of similar, growing amounts between the same accounts at different institutions. Returned-check fees add a cost to failed attempts. These controls narrow the window but do not remove it, because any system that credits an account before settlement is final leaves some float.

The Bottom Line

Bank staff, retailers, auditors and anyone tempted to juggle checks between accounts should treat kiting as fraud, which federal prosecutors can charge under the bank fraud statute. Electronic check clearing, Regulation CC holds and pattern detection software have shrunk the float, yet some window remains whenever accounts are credited before settlement. Watching for repeated, growing transfers between the same accounts remains the practical defense.