Fraudulent Activities in the Banking World

In the banking word there are many types of fraudulent activities that take place. This paper will focus on check kiting also known as, “paper hanging”. The Federal Bureau of Investigation defines check kiting as “a scheme which artificially inflates bank account balances, in accounts that are under common control, for purposes of obtaining unauthorized use of bank funds, through the systematic exchanging or swapping of checks between these accounts, in a manner which is designed to misuse the float that exists in the banking system.” (www.federalreserve.gov) This form of fraud maybe coming to an end as technology now allows most banks to use an electronic receipt system which instantly records and process cash transactions. This process has virtually eliminated the float time that is crucial in pulling off this scheme.

Check kiting is a form of fraud involving the transfer of funds between two bank checking accounts. A check written to the criminal from one bank is deposited, and more importantly credited, to an account at a second bank. Because that second bank now shows a positive balance, the criminal can withdraw enough money to deposit back into the first bank before the check bounces for lack of funds. Another form of check kiting involves the unwitting participation of a third party. A professional check kiter, also known as a “paper hanger”, may make a very small purchase and pay for it by check. Because grocery stores often allow customers to overwrite a check for additional cash, the check may be written for the maximum amount allowed. Funds from a second account are transferred to cover the amount of the check, but the cash remains in the custody of the dishonest customer.

People who find themselves short on funds may resort to writing a bad check in anticipation of a deposit during the float time. While this in itself is an illegal act, the chances of getting caught by the bank or prosecuted by a retailer are fairly slim. A professional check kiter is motivated more by personal gain than economic survival. However, a professional check kiter will continue to transfer funds between accounts until the law catches her or a bank catches onto the fraud.

In the United States, the banking industry is heavily regulated and even insured by the U.S. government. According to the United States Department of Justice, check kiting can be prosecuted under several existing laws including those against bank fraud (18 U.S.C. § 1344), misapplication (18 U.S.C. § 656), or required entries (18 U.S.C. § 1005). It can draw a fine of up to $1,000,000.00, imprisonment for up to 30 years, or both, and many first-time offenders with no criminal background have received stiff sentences. In addition to the federal remedies, state law often provides for alternate civil and criminal consequences.

In April 2009, 46 year old Wanda E. Wendell was arressted for her involvement in a check kiting scheme that netted her $14,013.14. She was charged with 108 fraudulent charges which included 18 felony accounts of theft by false pretense, 4 felony counts of issuing a bad check, 90 misdemeanor counts of theft by false pretense, and 21 misdemeanor counts of issuing a bad check.

Wilmington Trust Bank officials contacted the Delaware State Police after discovering irregularities in the personal and business checking accounts opened by Ms. Wendell in the summer of 2008. The accounts were opened with checks from Chevy Chase Bank however the account did not have sufficient funds to cover the deposited checks. She also made deposits from the Chase accounts into the Wilmington Trust Banks automated teller machine which gave her immediate access to the deposited funds. During this spree, Ms. Wendell legitimately

deposited $4700 into the accounts in an attempt to cover the frauduent depostits. Ms. Wendell is currently out of jail on bail and awaiting trial.

As long as the legal system continues to evolve and provide measures such as The Check Clearing for the 21st Century Act to try and stem criminal activity the banking industry really can not ask for anything more. One such measure is the Check Clearing for the 21st Century Act (Check 21) became effective on October 28, 2004. The law facilitates check truncation by creating a new negotiable, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. Unfortunately I was unable to find any statistics directly relating to check kiting but I woud think that this type of crime would be on the decline because technology has given banks the ability to almost instantly process transactions. Critical to a paper hangers ability to execute a check kiting scheme is the amount of time the bank needs to float or proces the checks. There will never be a way to in its entirety dissolve any crime as people will always find and use loop holes to their advantage.

http://www.federalreserve.gov/paymentsystems/truncation/

http://sbynews.blogspot.com/2009/04/millville-woman-arrested-in-check.html

“http://www.bankersonline.com/articles/sfpv01n02/sfpv01n02a9.html “paper hanger”