Check Kiting Between Accounts.

Check kiting between accounts exploits the time delay between depositing a check and its subsequent clearance, a concept known in banking as “the float.” This delay occurs because banks do not typically process deposits instantly; instead, they often grant credit access to a portion of a deposit before the funds have been transferred from the payer’s institution.

A check kiting scheme typically involves the following steps:

• The individual writes a check to oneself from Account A, which does not have sufficient funds.
• The individual deposits this underfunded check into Account B.
• The individual withdraws funds from Account B before the check from Account A clears.
• Before Account B runs out of funds, the individual repeats the process by writing a check from Account B back to Account A, thus artificially maintaining positive balances across both accounts.

Because this is essentially the process of creating a loan without repaying it, federal authorities focus extensively on identifying these patterns. Here, too, the key is the individual’s intent. Innocent balance errors, math mistakes, and honest oversights can all result in the apparent pattern of check kiting, but these innocent mistakes do not constitute criminal fraud.

The difference between a check kiting fraud scheme and a legitimate banking transaction often comes down to the specific details of the case. Federal prosecutors must prove that the person who was involved in the alleged scheme acted with “fraudulent intent.” But, as the language of the law suggests, what constitutes “fraudulent intent” may not be as clear-cut as it appears.

Here, as well, the government will need to prove that the person accused of check kiting did so intentionally, and we will need to focus on the relevant aspects of your client’s financial and mental state. While federal authorities may argue that the transaction patterns in your client’s case speak for themselves, it will be up to us to use all of the available evidence to convince prosecutors and judges that your client did not act with the intent to defraud.

Why is fraudulent intent the hardest issue in a check-kiting case?

In federal check kiting cases, prosecutors commonly contest the issue of intent. It may be that there is some evidence of intent, such as the timing of an account transfer or a deposit made just before a check cleared, but there may not be evidence to substantiate a deliberate scheme to defraud. With this in mind, if you or your business are being targeted by federal prosecutors in a check kiting case, our defense team will fight to protect you by challenging the validity of the government’s case against you in court.

What constitutes evidence of intent to commit check kiting fraud?

While intent is a subjective element that is not inherently provable, federal prosecutors will rely heavily on circumstantial evidence to prove that the person who was targeted in the case knowingly committed fraud.

These key types of circumstantial evidence include:

• Financial transaction records showing the timing and frequency of check-writing and deposits
• Financial account balances at all times
• Statements about the purposes of deposits and account transfers
• Patterns of repeated deposits from one account to another

All of these can be considered as circumstantial evidence, although they are more indicative of innocent mistakes than fraudulent intent. While all of these are circumstantial signs of fraudulent intent, they are not independent evidence of intentional fraud and cannot be used as independent evidence to support the government’s allegations.

How do you identify fraudulent intent from circumstantial evidence?

Identifying fraudulent intent in federal check-kiting cases relies heavily on looking at the circumstantial evidence as a whole. Circumstantial evidence is challenging because individual pieces of evidence may have different meanings depending on how they are viewed together. In particular, it may be difficult to prove when fraudulent intent was formed. Did it form before the first deposit? Did it form after a number of deposits? Was it formed retrospectively after an individual failed to make a deposit?

How are check kiting frauds investigated?

In federal financial investigations, federal authorities rely on account records and electronic transaction data. Federal agents will typically request access to these records from financial institutions and review the documents in order to determine whether the accused made any deposits. Forensic accountants may review these records as well, and summarize a lot of complex financial information for federal prosecutors.

As a result, if you are being targeted by federal prosecutors in a check-kiting fraud case, we will challenge the case against you. We will focus on questioning the assumptions made by the government’s experts, their methodology, the completeness of the data used, and the existence of plausible alternative explanations.

Spodek Law Group works out of offices in Manhattan, Brooklyn, Queens and Los Angeles.

When does check kiting cross into federal or state prosecution?

A bank fraud case in federal court will typically involve allegations that someone violated the bank fraud statute. According to 18 U.S.C. § 1344, it is illegal to “knowingly executes, or attempts to execute, a scheme or artifice-(1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises”

With regard to that statute, there are several points worth noting:

• First, the bank fraud statute applies to “attempts.” This means that, in the eyes of the federal government, you can face prosecution for bank fraud even if the kiting scheme failed or was caught before execution.
• Second, 18 U.S.C. § 1344 broadly protects “any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution” This means that check-kiting-like fraud is not limited to bank deposits. It is also prohibited if a business or individual fraudulently attempts to obtain other types of property owned by, or under the custody or control of the financial institution.
• Finally, the bank fraud statute contains extremely broad language targeting all fraudulent activities of all types. This is a very broad range of prohibited behavior, and this fact is a significant reason why federal prosecutors often seek bank fraud charges against individuals accused of committing check-kiting fraud.

Along with potential bank fraud charges under 18 U.S.C. § 1344, federal prosecutors can also seek charges of wire fraud and mail fraud in many cases.

For example, if prosecutors believe that interstate electronic communications, such as an email or wire transfer, were used to further the fraud scheme, then federal wire fraud charges are possible. Similarly, if prosecutors have evidence that the postal service, a commercial mail carrier, or some other method of interstate transport played a role in the scheme, then federal mail fraud charges can be sought in these cases as well. Both wire and mail fraud charges carry heavy penalties, and both can be used to add additional leverage for the prosecution in a bank fraud case.

Which financial and criminal consequences can follow a kiting allegation?

If you or your business is under investigation by federal prosecutors, and you or your business is accused of engaging in check kiting, there are a number of potential criminal and financial consequences.

Criminal sanctions, 18 U.S.C. § 1344, the bank fraud statute, authorizes imprisonment of up to 30 years, and a fine of up to $1,000,000. When these statutory prison sentences are read, the figures given are the maximums that could be imposed in any given case, rather than the sentences that are most likely to be imposed. When faced with a bank fraud charge, it is very likely that the prosecution will seek the maximum sentence based on the severity of the offenses committed, the likelihood that the offenses will be committed again, and the accused’s previous criminal history.

Restitution, In cases involving bank fraud and check kiting, courts will often order restitution. Restitution is a court order requiring the defendant to pay back the money or assets that were illegally obtained, or pay back the bank or financial institution that suffered losses as a result of the fraud scheme. In cases of alleged check kiting fraud, restitution is often a central component of a defendant’s financial losses and liability.

Civil recovery, Even if the criminal case does not result in restitution, the bank or financial institution being Targeted in the check kiting scheme could seek civil recovery. Civil recovery is the process of collecting a judgment obtained through a civil lawsuit, which may include recovering a defendant’s bank accounts, seizing a defendant’s properties and other assets, and placing liens on a defendant’s business. Civil recovery is a separate process from criminal prosecution and has nothing to do with whether or not a federal prosecutor has taken the case to criminal court. Along with filing for civil recovery, the bank or other institution could seek any other forms of relief that the law provides, including injunctive relief, such as forcing a business to stop certain practices and/or suspend its operations.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 888 348 8028.