Ethical Dilemma Minicase: Check Kiting

 

Introduction: -

Writing a check for a sum that is greater than what is in your bank account is known as "check kiting," which is unlawful. You count on the fact that it usually takes at least a few days for a check to clear, giving you enough time to raise the money or to earn interest on funds you don't have. Without ever having enough money, some fraudsters would keep switching between multiple accounts.

Case identification: -

Scott, operations manager at a small bank

Kathy, Scott’s co-worker “I found another check kiter,” said Kathy as she showed the checking account statement to Scott. “It is not a big one, though. Just a few hundred dollars.” Check kiting increased when the local economy was bad. Customers took advantage of the bank’s generous policy of not waiting until deposited checks had cleared before allowing the customers to have access to the money. A check kiter deposited a bad check from another bank in Scott’s bank. Then he or she wrote a check from Scott’s bank to cover the check from the other bank, and so on. In effect, customers were able to withdraw money that they didn’t have and cover it up with a series of bad checks back and forth between banks. Kiting wasn’t easy once it started, it required a steady stream of precisely timed checks and it was easy to spot the frequent identical deposits and withdrawals when you looked at the statements.

Scott recognized the name on the statement as that of a close friend of his wife. He certainly hadn’t thought she was dishonest, but she was a single mother, and it didn’t surprise him that she might be having financial difficulties. It was tough when a friend put you in this situation. What made it tougher, though, was that she was involved in an off again, on again personal relationship with Scott’s boss, and Scott wasn’t sure whether this was an off-week or an on week. She was also the chief financial officer of the bank on which she was writing checks, which explained how she was able to time her checks so well.

Alternatives: -

To help identify and stop check kiting, you can: 

1. Only accept checks written out for the exact amount owed to you
2. Wait for checks to clear if someone offers you payment and then wants a refund or some money back 
3. Be wary of “accidental” overpayments during online transactions
4. Regularly check your account and look out for checks clearing out of sequence
5. Restrict access to checks and keep record of every check used, and void checks that should no longer be in use  

Best alternative: - 

The best Alternative that I have found is that "Only accept checks written out for the exact amount owed to you"

Conclusion: -

In a situation like this, Scott normally documented the case and gave the information to his boss. Then Scott closed the account at his bank, called the customer, and notified the other bank that bad checks were being returned. Whoever caught the kiter first was able to pass the losses on to someone else. Check kiting was illegal, but when Scott used to call the local police, they had always told him they weren’t interested. He hadn’t informed them about a check kiter in over a year. But this case was different. It wasn’t obvious what Scott should do or to whom he should talk.

Reference: -

Clemens, E. (2021, August 20). What is check kiting? Chime. Retrieved February 12, 2023, from https://www.chime.com/blog/what-is-check-kiting/#:~:text=To%20help%20identify%20and%20stop%20check%20kiting%2C%20you,for%20checks%20clearing%20out%20of%20sequence%20More%20items