I. INTRODUCTION
Check kiting is the knowing deposit of uncollected funds and then drawing checks against those uncollected funds for the purpose of deposit in another account to pay uncollected fund deficiencies. The practice may occur in a number of ways and may involve several financial institutions. It has been reported that banks most susceptible to check-kiting schemes are those that do not employ proper internal controls and reporting systems to monitor this and other suspicious activity or do not enforce internal procedures already in place. Liberal practices relating to wire transfers or funds availability also increase risks to the bank. Exceptions to bank internal controls that approve drawings against uncollected funds, overdrafts and wire transfers may become a more routine practice with the result that bank personnel overlook the risks involved. Bank regulators encourage banks to manage risks posed by such fraudulent activity and urge bank management to ensure the effectiveness of internal controls used to identify suspicious activity and to minimize risk.
II. INTERNAL CONTROLS
Internal controls that banks should consider was the subject of an OCC Advisory Letter dated August 6, 1996. Those suggested are as follows:
Although banks must comply with Regulation CC time frames, the bank should know of theregulation’s exceptions to the normal funds availability schedules and use those exceptions appropriately.
The OCC also gave specific examples of suspicious circumstances that might indicate a check-kiting scheme:
III. NOTIFICATION AND REPORTS
Check kiting is an unlawful practice and should be reported to law enforcement officials as soon as discovered. You should also notify your insurance carrier, primary regulator and file a Suspicious Activity Report (SAR).