# Understanding Kiting: Fraudulent Checks and Securities Explained

## What Is Kiting?

Kiting involves fraudulently using financial instruments, such as checks, to obtain unauthorized credit. This practice targets banks and retailers, exploiting float times to facilitate illegal withdrawals.

### Key Takeaways

*   Kiting is a form of fraud that exploits financial instruments like checks or securities to obtain unauthorized credit.
*   Check kiting involves writing checks between accounts with insufficient funds, relying on the float time for processing.
*   Retail kiting uses bad checks at retailers to purchase goods while manipulating check clearing times for financial gain.
*   Securities kiting occurs when firms fail to settle trades within the required time frames, thereby violating SEC regulations.

## How Check Kiting Exploits Bank Systems

Carried out within the banking system, kiting typically involves passing a series of checks at two or more banking institutions, using accounts that have insufficient funds. Relying on the [float time](https://www.investopedia.com/terms/f/float.asp) required for a check deposited at one bank to clear at another, the kiter typically writes a check at the first bank against an account at the other.

Before that check clears, they then withdraw the funds from the second bank account and deposit the funds back into the first. The process may then be repeated in the opposite order, sometimes repeatedly. The net result is a series of fraudulent withdrawals that rely on being a step ahead of the fraudulent check on which they are based, having cleared.

Reduced times for checks to clear has helped reduce the incidence of check kiting involving banks, as have such practices as banks placing holds on deposited funds and charging for returned checks.

## Understanding Retail Kiting and Its Implications

A variant of check kiting is known as "retail kiting." This relies on cashing a bad check (number one) at a retailer to purchase an item. Then, before that check has cleared, the kiter writes another check (number two), which may include (or entirely comprise) a cashback payment. While [cashback](https://www.investopedia.com/terms/c/cash-back.asp) is now most often associated with debit cards, some retailers still offer this convenience with checks.

The cash from check number two is then deposited into the account, to allow check number one to clear. The fraud is then repeated in order to cover check number two and may be sustained in order to stay ahead of the float and fraudulently obtain a series of items and cash withdrawals.

## Securities Kiting and Regulatory Risks

Kiting that involves misrepresenting securities generally occurs when securities firms flout [SEC](https://www.investopedia.com/terms/s/sec.asp) regulations regarding the timely delivery of buy-and-sell transactions, which must be completed within a three-day settlement period. If a firm doesn't receive securities on time, it must buy the shortage on the [open market](https://www.investopedia.com/terms/o/open-market.asp) and bill the delinquent firm for fees.

The delinquent firm is considered to be practicing the fraudulent act of kiting if it fails to purchase the securities on the open market and maintains a [short position](https://www.investopedia.com/terms/s/short.asp), delays delivery, or takes part in transactions contrary to the proper settlement of trades.

## The Bottom Line

Kiting involves deliberately manipulating financial instruments, such as checks or securities, to fraudulently obtain unauthorized credit. This illegal practice can include writing checks on insufficient funds or misrepresenting securities to bypass SEC regulations. While advancements in banking technology have reduced occurrences of check kiting, the misuse of financial instruments remains a significant concern. Understanding the mechanics of kiting helps individuals and institutions protect themselves from financial fraud and underscores the importance of adhering to regulatory requirements.  

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Amendment to Securities Transaction Settlement Cycle-A Small Entity Compliance Guide](https://www.sec.gov/tm/t2-sbrefa)."
>     
> 2.  Code of Federal Regulations. "[17 CFR §242.204](https://www.ecfr.gov/current/title-17/chapter-II/part-242/subject-group-ECFR1607681c7b4f78d/section-242.204)."