We have a customer that owns/controls multiple business accounts with us. Account A receives a deposit with a check drawn off of Account C. Account B receives a deposit from a check drawn off of Account A. Account C receives a deposit from checks drawn off of Account B. So at the end of the day it is all a wash. However, the amounts of the deposit are over the balance amount in any of the accounts.

Since its all internally its not following under the standard check kiting definition. He has provided an explanation that this is how his bookkeeping needs to done, however we are uncomfortable (ok, suspicious) in the way these transactions are conducted. We are debating if a SAR should be filed or not. I am inquiring what others might do with this type of situation. Since its all internal, are we reading more into it then necessary.

Are all accounts for the same entity?
Or are these separate businesses?

"He has provided an explanation that this is how his bookkeeping needs to done, however we are uncomfortable (ok, suspicious) in the way these transactions are conducted."

I think that is all that needs to be said. You have deemed the action as outside of normal business practices to a point that it appear suspicious and the customer's explanation did not allay those suspicions. That is the trigger for a SAR.

Is it possible that the customer is testing you to commit some type of fraud in the future?

These are different business entities that he is a common signer or owner on. I dont think he is testing us, just the way of doing his books, but for all of what reasons, we know only what he tells us.

I don't think the customer has provided you with a reasonable business purpose for the activity. I do think you've got sufficient concerns to file.