Definition
Kiting is a fraudulent banking practice involving the use of non-existent funds in a checking or other bank account. Essentially, it is a scheme where cash is recorded in more than one bank account, but in reality, is either non-existent or is in transit. The crime is committed when the funds are used by the fraudulent party before banks discover the deceit, which can take time due to the “float” time between deposits.
Key Takeaways
- ‘Kiting’ is a fraudulent act involving the manipulation of financial transactions or records, often conducted to inflate the value of cash accounts or to hide deficits. The term is derived from the flying of a kite, which moves up and down with the wind, symbolizing the floating checks or fraudulent transactions.
- Kiting can take various forms including ‘Check Kiting’ where individuals take advantage of the time it takes for a bank to process checks or ‘Credit Card Kiting’ which involves using credit from one card to pay off another. These practices are illegal and could lead to serious penalties such as fines or imprisonment.
- Banks and financial institutions have systems and checks in place to identify and prevent kiting. They employ strict record-keeping and reconciliation processes, as well as robust software systems to detect irregularities that may suggest kiting. Nevertheless, individuals and businesses are encouraged to keep a close eye on their financial transactions to safeguard against this form of fraud.
Importance
Kiting is a crucial term in finance as it refers to a fraudulent practice that can have significant impacts on a business’ financial standing and reputation.
Essentially, kiting involves the deliberate issuance of a check for a higher value than the account balance to exploit the time it will take to clear and settle the transaction.
This dishonest practice can temporarily inflate the account balance, helping to conceal fraudulent financial activities like embezzlement or to extend credit unlawfully.
As such, understanding kiting is important for maintaining financial integrity, preventing fraud, and ensuring accurate representation of a company’s fiscal health, thus impacting risk assessment, decision-making, auditing procedures, and the overall trust of stakeholders.
Explanation
Kiting is primarily a method used to manipulate an account’s balances artificially. When properly executed, it involves exploiting the time lag that exists in certain financial transactions to make it appear as though a balance exists in an account, when in fact it doesn’t.
As such, the principal purpose of kiting is to maintain an illusion of available cash or credit, allowing parties that employ this tactic to potentially continue inflating their available finances. However, even though kiting can temporarily provide the illusion of liquidity, it is crucial to understand that it does not generate real profits or cash flows.
Entities may resort to this technique out of desperate need for cash or to conceal misuse or misappropriation of funds. Ideally, the intention behind kiting is not to default but to buy enough time to cover the funds or, in some cases, mislead auditors and stakeholders.
Regardless, it’s a risky and fraudulent practice, often heavily punishable by law when detected.
Examples of Kiting
Kiting, in the world of finance, refers to fraudulent activities that involve the alteration or manipulation of financial documents, typically checks, in order to obtain additional credit or extended personal finances. It often requires the involvement of two or more banks and it’s an illegal activity. Here are three examples:
Check Kiting: One of the most common examples can be seen in check kiting, where an individual writes a check from bank A to himself, knowing there are inadequate funds to cover the check’s value. Before the check being deposited in bank A for clearing, the individual writes another check from his account in bank B to bank A. Before that check can be cleared, another is written from bank A to bank B. This circular process continues, essentially giving the individual interest-free loans.
Retail Kiting: Retail businesses can also take part in a form of kiting. This typically involves the use of credit issued by the supplier. A retailer might order more stock from a supplier and ask to pay at a later date. It then sell the stock quickly and use the proceeds to settle the previous debt before due date. Like check kiting, this process can continue in a vicious cycle, gifting the retailer an interest-free loan.
Corporate Kiting: Large corporations have also been known to kite. An example could involve a corporation using funds from a different company (company B), which they also own, intending to replace the funds before company B realizes that the funds are missing. In the meantime, the corporation may use the funds for investment or other corporate action. If the fraud is not checked, such operations can run for years without being noticed.By all means, the practice of kiting is illegal and punishable by law. It involves intricate planning and execution, and it usually leads to strict consequences when detected.
FAQs about Kiting
1. What is Kiting in finance?
Kiting in finance refers to the act of leveraging a low or zero balance in your account by writing checks or drawing drafts from accounts with insufficient funds. The term is also used to explain a type of fraud involving the intentional writing of a check for a value greater than the account balance from an account in one bank, then writing a check from another account in another bank, also with non-sufficient funds, with the second check serving to cover the non-existent funds from the first account.
2. What are the consequences of Kiting?
Kiting is illegal and highly punishable by law. It is considered check fraud which can lead to significant fines or imprisonment. If found guilty of kiting, it can also lead to lasting damage to your credit score and serves as a deterrent for institutions who may wish to do business with you in the future.
3. How can Kiting be prevented?
Preventing kiting can be done by implementing stringent checks and policies in place within financial institutions. Regular monitoring of account activity, especially focusing on large or frequent transfers, can serve as an early warning system. Government regulations also enforce policies that require checks to be cleared within a certain period of time, to prevent attempts at kiting.
4. Is Kiting the same as float?
No, kiting and float are not the same. The difference is that float refers to the amount of time it takes for money to move from one account to another, and is a legal and standard part of banking operations. In contrast, kiting manipulates float time to create false balances in an account and is illegal.
5. Can credit card kiting be done?
Yes, credit card kiting can be done and refers to the process where an individual uses the available credit on a credit card to pay off another card to keep low or zero balance. This action has several risks and consequences and may even lead to worsening the cycle of debt. It is also viewed as fraudulent activity by lenders.
Related Entrepreneurship Terms
- Check Kiting
- Bank Float
- Short-term Loans
- Daylight Overdraft
- Fraudulent Activities
Sources for More Information
- Investopedia: It’s an excellent resource for understanding various finance terms, including Kiting.
- Nasdaq: This site provides a wide range of financial definitions including Kiting.
- Corporate Finance Institute: You’ll find detailed explanations of various financial terms here, with a dedicated section for accounting concepts like Kiting.
- Accounting Tools: This site includes a variety of resources meant specifically for understanding accounting concepts like Kiting.
