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Understanding Kiting: Types, Methods, and Consequences

Unveiling the World of Kiting

Kiting, in the financial realm, refers to the illicit use of financial instruments to unlawfully secure additional credit. This deceptive practice encompasses various fraudulent techniques aimed at exploiting loopholes within the financial system.

Key Takeaways

  • Kiting involves the illegal manipulation of financial instruments to deceitfully access extra credit.
  • Securities firms engage in kiting by disregarding SEC regulations governing securities transactions.
  • Check kiting primarily targets banks or retailers through the issuance of bad checks drawn on accounts with insufficient funds.

Exploring Check Kiting Involving Banks

Operating within the banking sector, check kiting typically involves maneuvering a sequence of checks across multiple banking institutions using accounts with inadequate funds. Exploiting the time delay for check clearance between banks, the kiter writes a check against one account while withdrawing funds from another before the original check clears.

This process of depositing and withdrawing funds between accounts is repeated, relying on the timing mismatch between check clearance and fund withdrawal. While advancements in check clearance mechanisms have curbed instances of bank-related check kiting, preventive measures such as fund holds and penalties for returned checks have also contributed to its decline.

Diving into Retail Kiting

A variation of check kiting, termed 'retail kiting,' involves cashing a bad check at a retailer to make a purchase. Subsequently, before the initial check clears, the kiter writes another check, often including a cashback amount. This cash is then deposited to facilitate the clearance of the first check. This cycle is perpetuated to cover the subsequent check, allowing the kiter to exploit the time gap and fraudulently obtain goods and cash.

Understanding Kiting with Securities

Kiting involving securities typically occurs when securities firms violate SEC regulations by failing to complete buy-and-sell transactions within the mandated settlement period. In such cases, the delinquent firm must procure the deficit securities from the open market and bear any associated costs. Failure to adhere to these regulations by maintaining short positions or delaying transactions constitutes fraudulent kiting.