Is it required, once you have identified a customer as kiting, to close the account?

No

Seems to me this is a "best practices" rather than a regulatory requirement. It would also be the safe and sound practice as your bank can suffer a loss by the actions of the "kiter".

If you know the customer is kiting, why would you want to keep the account open?

When bankers say they are "watching" a kite, my standard response is: What are you watching for, the mushroom cloud? Close it. Your bank is making an unsecured, uncompensated, unnegotiated loan under circumstances that make it a federal crime, bank fraud.

The risks of leaving such an account open are quite real and there are no potential rewards.

Look closely at Wayne Barnett's post in this thread.

Not being able to prosecute someone because you knew and did not act (which was viewed as an unsecured loan) might stop some 'watching of kites'. It'll definitely make me think more!

I'll echo the "stop it as soon as you can" concept. Banks have been held liable to other banks because they (let's say "Bank A") knew a kite was going on with Bank B as the counterpart and waited to stop the kite when Bank A knew they would not take the hit but Bank B would. Bank A can be deprived of holder in due course status due to its knowledge of the kiting. You can also turn this around to hold another bank liable if they play the wait-till-the-music-stops game and leave you holding the bag. The key is to find out what they knew and when they knew it.

Absolutely, without a doubt, close the account. I have seen too many loan officers throw their weight around, and subsequently throw the bank's money right out the door. Unfortunately, it takes a loss to make those officers "see the light". For the record, our bank is now all on the same page...ours was a doozy. Now I get calls constantly b/c our officers are paranoid. The last kiter I caught was a lady that worked for a competitor bank. It gave me great joy when I called her work number to talk to her that it was another fine financial institution . We did not lose any money, but she lost her account and was reported to ChexSystems.

My personal favorite was the one about the preacher's wife and the preacher's daughter-in-law who had involved three banks. They were working very hard to keep $2,500 up in the air.

My second favorite was when I took a new job and attended my first Rotary meeting. Prior to the beginning of the program, a fellow at my table began explaining to another businessman how he should set his payroll account up at a bank other than the one where he deposited his receipts. Then, whenever he was short, he could deposit the check to cover his payroll on the day the payroll checks were issued and gain a few days. I worked in the trust department, but went to bookkeeping and checked when I got back to the office. We had his payroll account, temporarily. No quarter on this issue.

One of the banks using our Kite System found that it had a customer doing the following:

1. Customer, who sold high-end used cars, had five loans at the bank. All were secured with his inventory. Four of the loans were for inventory purchases; one was a revolving line of credit.

2. The bank, with the help of our system, noticed that he was drawing on the line of credit to make the payments on all five loans. He would make the draw on Monday, and make his five note payments two days later.

3. There was no other activity in his DDA account; just the deposit and five subsequent withdrawals. He had opened an account at another bank, and all of his business transactions were flowing through it.

4. The bank determined he'd been doing this for eight months and it called his loan; he was able to move it to another bank. The total of the five loans was $500,000. He filed for bankruptcy six months later.

It's my understanding that for legal purposes, this isn't considered a kite. However, the best way to find something like this is with a good kiting system. (We've had three other customers find similar events. In half of the cases, including the one above, the customers have not been on the watch list.)

Regards,
Wayne Barnett, President
Wayne Barnett Software
877-945-4344
www.barnettsoftware.com
wbarnett@barnettsoftware.com

That is the truth! If you give someone a chance to talk, you find out all KINDS of things....let them hang themselves. The stories are endless.

In response to Ken's Faves, I worked for one of the "big banks" and did nothing but look for kiting. In one week, I identified 3 CPA's and 3 churches (all different religions)....one in my tiny hometown!

Sorry, have to resurrect this thread....

We've got someone who, to us anyway, it's pretty obvious that he's kiting. He's writing checks on Bank A payable to Bank B, then checks on Bank B payable to Bank C... Not many "real" deposits or withdrawals coming in and out, just a lot of $$ moving around.

Our corporate counsel, however, says we can't shut him down until we actually see a check returned for NSF. Neither I nor the Risk Manager understand that postion. We want him out of here now!!!

The customer is using lines of credit and visa advances and HELOCs (at 4 different institutions, no less!) to do this, not checking accounts, so I don't know if that makes a difference in closing it out ....

Anyone have experience with a kiter using lines of credit? How did you handle it? Anything special you have to do to get him out?

What about placing case by case holds on his deposits. Believe me, he won't like that and it will help to protect you. I cannot believe your counsel told you that. You want to be the first bank to shut him down or you could end up holding the bag. Good luck!

You can tell your corporate counsel that the law does not require you to keep any account open, particularly those that you are not comfortable with. I would really be interested in knowing what law or rule says you cannot close a kiting suspect's account unless there are NSF checks. Maybe you should tell counsel that you will keep the account open only if he/she (counsel) will sign a document accepting financial responsibility for any losses the bank may incur as a result of keeping the account open.

Perhaps there is some arcane left-coast law that counsel is thinking of?

I usually advocate using counsel's expertise, but this is one time when I'll join the chorus singing a different tune. Challenge counsel's advice here. There's no federal rule -- unless recurring federal payments are entering the account via ACH (31 CFR 210) -- that would require you to keep this account open one minute longer.

OK, I agree that this needs to be shut down, but it would appear that we are dealing with open-end credit accounts and not true checking accounts. This is not quite as easy as pulling the plug on a typical check kite unless you want to get crosswise with your credit contract and possibly Reg B.

Quote:

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The customer is using lines of credit and visa advances and HELOCs (at 4 different institutions, no less!) to do this, not checking accounts, so I don't know if that makes a difference in closing it out ....

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Depending on the type of account that is at your institution, I would look to the contract and determine if there is any default occurring. If your account is secured, your risk is somewhat minimized. If it is not, I'm sure there are provisions for periodic review and I would request a new application and pull a credit report and then deny the renewal and at least freeze the line.

Just some thoughts......

Thanks, everyone, for your input.

We did find out that although we have to credit his loan "payments" to his balance upon receipt, we don't have to make that amount immediately available on his credit lines. So we're putting an 11-day "hold" on all his line of credit payments (the checks are coming from out of state, and we have very definite reason to doubt collectability).

He's been using line of credit checks from Bank X to pay his line of credit and visa here, then writing checks on his ($0.01 balance) checking account to pay lines of credit at Bank Y, allowing the checks to overdraft from the visa and LOC. He's probably writing them from Y back to X, also. There are at least 4 other financial institutions involved, besides us. It's a big mess with pretty high $$ amounts and we don't want to be the last one holding the bag. Both the LOC and Visa are unsecured....

We did run a review on his LOC and visa, but he's got a pretty high credit score, and since that's what we base our periodic reviews on, we can't treat him any differenty. We can't close them or decrease his limits, so we'll just keep delaying availibility of his funds for as long as we have to.

Counsel says we can't actually close his credit lines until he defaults or has at least one NSF. Seems very silly that we can't do anything to protect ourselves against someone we feel has a high potential to default... I guess "innocent until proven guilty"...

We're hoping he'll decide the delayed availbility makes it too much trouble to keep using our accounts, and we'll be out of the loop... We may never see payment on what he currently owes us, but at least we won't be out any more.

do any of those accounts have an "insecurity clause" you could invoke to break the chain?

Wayne

If you want to market your product and company, perhaps you should advertise on a xcommercial site where you PAY for the ad.

Fraudboy:

Get the knot out of your panties. Wayne's comments were made six months ago, and I for one found the comments interesting.

Six months or one day? What is the difference?

Folks:

OK -- the skunk contest's over . . .

As happens in so many threads, no one mentioned FILING A POLICE REPORT. If you close the account, filing a report enhances the legitimacy of your position. Yours isn't the only institution involved -- filing a report helps ALL of your community's institutions and merchants. And remember that you can always freeze account activity (several times if it's necessary) -- pending further investigation. This freeze will drive a kiter nuts -- and it will likely cause him/her to visit you to complain. A wonderful opportunity for the Security Officer's to exercise his/her counseling skills . . .