Overview
Definition
Kite (or kiting): An informal term that describes the practice of creating fraudulent financial instruments, such as checks or bills, to exploit the delay in bank processing. This typically involves writing checks on accounts with insufficient funds, expecting to cover the shortfall before the checks clear.
Examples
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Check Kiting: John writes a check from his account at Bank A, then deposits it into his account at Bank B, even though there are insufficient funds in Bank A to cover the check. Before the check clears, he writes another check from Bank B and deposits it into Bank A to cover the initial amount. This cycle continues, creating a false impression of having funds.
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Accommodation Bill Kiting: Company X issues a bill without actual goods or services to Company Y, with the understanding that Y will dishonor it. X discounts the bill at a bank, receiving funds from the bank under false pretenses.
FAQ Section
Q1: What are the legal implications of kiting? A1: Kiting is illegal and considered a form of bank fraud. It can lead to severe penalties, including fines and imprisonment.
Q2: Is there a difference between check kiting and bill kiting? A2: Yes, check kiting involves writing checks between bank accounts, while bill kiting involves issuing and discounting accommodation bills.
Q3: How can banks detect kiting activities? A3: Banks may use software to monitor for unusual patterns of transactions, such as frequent deposits and withdrawals of the same amount, particularly between the same accounts.
Q4: What can businesses do to avoid being involved in kiting operations? A4: Businesses should implement robust internal controls and conduct regular audits to ensure that all financial activities are legitimate.
Q5: Can individuals be prosecuted for kiting without realizing it was illegal? A5: Yes, ignorance of the law is not a defense. Individuals can still be prosecuted if they engage in kiting, even without knowledge of its illegality.
Related Terms
- Accommodation Bill: A bill of exchange made payable to a person and provided with no consideration (independent of goods or services), usually for the purpose of raising funds.
- Bank Fraud: Legal term to describe illegal activities in which one defrauds a financial institution for financial gain.
- Overdraft: A deficit in a bank account caused by drawing more money than the account holds.
- Financial Fraud: Any form of deceptive practice that results in financial gain—particularly those involving deceit, trickery, or breach of confidence.
Online References
- Kiting Basics Explained - Investopedia
- Fraud Definitions - Investopedia
- Overdraft Services - Investopedia
Suggested Books for Further Studies
- “Fraud Auditing and Forensic Accounting” by Tommie Singleton and Aaron J. Singleton
- “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard Schilit and Jeremy Perler
- “Forensic Accounting and Fraud Examination” by William S. Hopwood, Jay J. Leiner, and George R. Young
Accounting Basics: “Kite (Kiting or Kite-Flying)” Fundamentals Quiz
Thank you for learning about the complexities and legal implications of kiting. Take the quiz to challenge your understanding and ensure you can recognize and prevent such fraudulent activities.
