Are we obligated to file a SAR if an employee is kiting....even an amount below $5,000???

Yes, there is no dollar amount threshold for insider abuse.

Mandatory levels for reporting include insider abuse involving any amount of money. an insider is any bank employee, officer or director.
I would file the SAR.

Yes. Interview and fire the employee first, then file the SAR.

Thanks guys. My thoughts as well but the wording on the SAR instructions..."known or suspected Federal criminal violation" had me thrown.

Kiting is a federal criminal violation. It's theft from an insured bank.