Despite the business community's rapid adoption of digital payment methods, some companies continue to rely on paper checks. But there's a long-standing problem with checks: They make businesses vulnerable to several damaging types of fraud, including check kiting. Here's how the scheme works.
In a check kiting scheme, the perpetrator takes advantage of the "float," or the time between when a check is deposited and when the bank collects funds on the check. In essence, a bank that accepts check deposits and releases funds immediately provides account holders with interest-free loans. Some unethical businesses take advantage of this process because it temporarily inflates their account balances.
Although the total number of days it takes banks to process checks and collect funds has declined in recent years, there's still some opportunity to capitalize on the float. This is especially true when banks, in the interest of good customer service, release funds on the same day that they receive a deposit and before they've had a chance to present a check for payment.
Check kiting schemes typically involve two or more banks, although some schemes can involve multiple accounts at one bank if there's a lag in how the institution processes checks. The perpetrator's goal is to falsely inflate the balance of a checking account so that written checks that otherwise would bounce, clear. Sometimes, check kiting involves the periodic deposit of legitimate funds, which typically minimizes the likelihood that a bank will detect the scheme quickly.
Check kiting is a federal crime and the penalties can be stiff: up to thirty years in federal prison, plus fines of up to $1 million. Even if a bank declines to press charges, it may close an account and report the incident to ChexSystems, which is similar to a credit bureau. This can make opening new business accounts difficult.
The following five strategies can help prevent people in your organization from using your company's accounts for check kiting:
Note that these actions can also help you detect and minimize the risk of other forms of bank fraud, such as employees stealing company checks and making them payable to themselves.
Check kiting is a relatively easy scheme to perpetrate, particularly if your company doesn't keep an eye on its check stock and bank account activity. The steps detailed here can prevent many schemes and associated financial losses. But for more comprehensive internal controls, talk to a forensic accountant.
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