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.

Riding the float

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.

Although the total number of days it takes banks to process checks and collect funds has declined in recent years, there’s still 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 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.  

Grounding the kite 

Check kiting is a federal crime and the penalties can be stiff — up to 30 years in federal prison, plus fines of up to $1 million. Even if a bank declines to press charges, it may close the account and report the incident to ChexSystems (similar to a credit bureau). This can make opening new business accounts difficult.

Several strategies can help prevent people in your organization from using your company’s accounts for check kiting:

• Educate employees about bank fraud. Describe the types of transactions that qualify as bank fraud and their red flags. This makes workers aware of suspicious activities and demonstrates management’s commitment to preventing fraud.

• Rotate key accounting roles. Segregate accounting duties and, if possible, rotate tasks among staffers. Rotating jobs can help uncover ongoing schemes and reduce the amount of time the perpetrator has to steal.

• Reconcile bank accounts daily. Make sure someone trustworthy, who isn’t involved in issuing payments, reconciles every bank account your company operates.

• Maintain control of paper checks. Store blank checks in a locked cabinet or safe and limit who’s allowed to order new ones. Also, periodically conduct an inventory of blank check stock.

• Go digital. The most effective way to prevent kiting and other forms of check fraud is to stop using paper checks altogether. Consider replacing them with ACH payments or another form of electronic payments. 

Too easy

Check kiting is relatively easy to perpetrate, particularly if your company doesn’t keep an eye on its check stock and bank account activity. To implement comprehensive internal controls, contact us.

(This is Blog Post #1125)