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Check Kiting: What It Is and How to Avoid Potential Scams

By Mike Zaccardi, CMT, CFA · June 16, 2022 · 7 minute read

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Check Kiting: What It Is and How to Avoid Potential Scams

Check kiting is the illegal act of writing bad checks using bank accounts with insufficient funds. Common variants include retail check kiting, securities-based kiting, and embezzling corporations. Consumers and business owners should know about this fraudulent practice to protect themselves.

While mistakenly writing a bad check is often not a serious issue, there can be harsh penalties, including prison time, for intentionally engaging in check kiting. Knowing how to avoid this scam can save people time and money. As the financial world grows more digital and mobile, this age-old illegal practice remains a risk.

•   Here, you will learn:

•   What is check kiting?

•   What are examples of check kiting?

•   What are the consequences of check kiting?

•   How can I avoid check kiting scams?

What Is Check Kiting?

Check kiting is the illegal practice of writing bad checks on accounts with insufficient funds. While credit cards and mobile payment methods grow more common, checkbooks are still used today, so kiting remains an issue. This fraudulent activity seeks to take advantage of what’s known as the bank’s float period. What’s a float period? It’s the time it takes a financial institution to determine if an account has funds to clear the check. If the funds are there, then the amount is cleared and made available for the payee to use. Nefarious individuals engage in check kiting to essentially swipe money from a bank by pulling cash from accounts that do not have enough funds to cover the checks.

Kiting is not only done through banks and checking accounts, but also with retailers and even individual companies. Retail kiting is performed by cashing a check on an account with insufficient funds to purchase goods and services. There are other variations that financial con artists attempt to pull off, too; more details on these are below.

How Does Check Kiting Work?

Banks and credit unions likely know the answer to “What is kiting?” but business owners and retailers might wonder about this practice. Kiting is the illegal practice of obtaining credit and cash from accounts and other financial instruments. One example of kiting happens when a scammer writes a bad check or uses securities to gain leverage while skirting regulations.

Real-Life Examples of Kiting

Perhaps the most common kiting example is within the banking world. Knowing what is kiting in banking terms and how to cash a check can help you avoid falling victim to this type of financial scam. That, in turn, can help you steer clear of run-ins with the law and falling victim to this type of financial scam. (It can also be wise to be cautious when signing over a check to another. That can potentially cause problems as well.)

There are simple and complex check kiting examples. With a checking account, a grifter might write a check for $100 on an account that only has a $20 available balance, then deposit that check in a separate account. The $100 is then quickly withdrawn from the second account, leaving the first account overdrawn. In this case, the individual took advantage of the bank’s clearing window to steal money.

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Variants of Check Kiting

There are other examples of this malicious practice in the business world. Individuals looking to harm the banking, retail, and corporate world are often highly creative in their practices to swindle cash. Below are a few variants of check kiting to watch out for; also protect yourself by making sure that the financial institution where you hold your bank account has top-notch fraud protection to help keep your cash safe from scammers’ activities.

Circular Check Kiting

Circular check kiting is among the most common forms of kiting. A financial con artist will use multiple bank accounts, maybe even at different banks, to illegally take advantage of the bank account float period. As described above, the scammer will pull real cash from non-existent money. While cashing checks without a bank account is a legal practice, doing so with no funds backing it up is kiting.

Circular kiting works by writing fraudulent checks on real accounts to gain unauthorized credit. The fraudster makes a deposit with a check they know will bounce, but quickly withdraws real cash, getting money in hand and leaving the banks with overdrawn accounts. With circular check kiting, the individual might get extra creative and use different names or even several identities to hide their actions.

Retail-Based Check Kiting

Retail-based check kiting happens when an unscrupulous person uses other types of businesses to swindle cash. It may involve the simple yet illegal act of writing bad checks around town. A financial huckster might seek to purchase goods and services by writing a check on an account with insufficient funds. The con artist takes or receives the products, but then the check bounces and the money never makes it back to the retailer.

Another dubious method involves requesting cash back on a bad check at the register. A second check may be used to cover the first check to stay ahead of the bank float period. This can facilitate a series of illegal retail acts. If a retailer becomes aware of this scam, they can try to issue a stop payment on the check. This might help prevent illegal activity, but it’s no guarantee.

Kiting With Securities

Kiting is also a problem in the investing world. Firms illegally use the Securities and Exchange Commission’s (SEC) settlement window to keep a short position in the market without actually purchasing the securities. (Selling short means an investor anticipates that a stock’s price will drop and they can buy low and make a profit.) The SEC’s three-day settlement period requires timely delivery of transactions and securities. If an individual exploits settlement delays in order to transfer unavailable funds, they are engaging in kiting. A trading company that does not receive securities within the three-day period is required to buy shares in the market.

Corporate Check Kiting

Corporate check kiting typically happens when a company doesn’t have the usual limits on deposits. Large sums can be put in an account. Deceitful managers or owners of a firm might take advantage of this; they might deposit bad checks and then immediately spend the cash, before it’s clear that the check won’t clear.

Consequences of Check Kiting

Obviously, check kiting, like other forms of bank fraud, can cause financial loss and a considerable amount of stress, anger, and frustration. There are a range of consequences to the illegal activity of check kiting. Penalties for this type of financial fraud vary depending on how severe the case is:

•   Banks might restrict someone’s account features in small cases.

•   Larger scams can result in misdemeanor or even felony charges.

•   Fines and prison sentences can happen after a severe crime.

Avoid Check Kiting Scams

While there is no sure way to avoid becoming a victim of malicious illegal financial activity, there are steps you can take to reduce your chances. These include:

•   Know how to identify a fraudulent check and a check’s expiration date

•   Be aware of customers and individuals with whom you do business. Take steps to verify that checks are good.

•   Avoid wiring funds to people you do not know.

•   Use a voided check’s information to verify the account is real.

Also be cautious about scam scenarios in which someone sends you a check that overpays you and then requests that you quickly return the difference to them. You could wind up the victim of fraud.

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FAQ

Why is check kiting illegal?

Check kiting is illegal because it fraudulently uses financial products to gain unauthorized additional credit. It typically employs checks for which there are insufficient funds (that is, checks that will bounce rather than clear). Another practice involves unlawfully embezzling money from a bank or business.

Why is it called kiting?

The term “kiting” is thought to come from the nineteenth-century practice of bond issuance that had no real financial backing. It was said that the only thing keeping the bonds afloat was “air” and nothing else. “Check kiting” grew in prevalence during the 1920s, perhaps as retail banking became more common.

What is cash kiting?

Cash kiting takes advantage of banks through the use of two separate accounts. A fraudster might write a check on one account for more than its available balance and deposit it in the other account. The individual takes advantage of the bank float period, which is the processing time for funds to clear. During cash kiting, both accounts appear to have more funds than they truly do. The fraudster can profit from drawing cash from the accounts when it’s not really available, but the bank doesn’t know that yet.


SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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This article is not intended to be legal advice. Please consult an attorney for advice.

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