One of my audit duties is reviewing employee accounts. I have found three employees over the last eight months that were kiting. They are then handled by HR and their Supervisor on a case by case basis. My question is how do other banks handle this situation? Is the employee always fired, account closed or handled on a case by case basis? Is an SAR filed?

I don't know how it should be handled but I do know that a SAR must be filed.

The agencies' SAR regulations mandate that a SAR must be filed for:
1. Insider abuse involving any amount.

That would be kiting by bank employees!

I have never worked at an intitution that kept an employee on after they were caught kiting. You also need to review your bonding agreement - you may be under an obligation to notify your bonding agent if you allow them to remain.

Kiting checks between f/i's is an illegal activity. IMO, if an employee is participating in such activity instead of discussing financial difficulties with a trusted supervisor or loan officer to seek resolution, I have to question what else they may be concealing. Further, participation in illegal activites by bank employees, especially when the bank is involved, should be grounds for dismissal.

A more common occurence and grey area among employees, IMO, is cash kiting. Cashing a check at a merchant and depositing to cover checks written. This is an act that some employees may not understand is a form of kiting. I would be more likely to counsel first occurences in this situation.

Does anyone else struggle with this one?

At the last bank I worked for, this became a real problem. The employees caught "cash kiting" were fired. However, I agree that all employees should be told when hired that these practices are prohibited.

Citation
31 U.S.C. 5318(g)
12 CFR Part 353; §§ 21.11
Summary
Banks, thrifts and credit unions must file reports when they detect a known or suspected federal criminal violation involving insider abuse, bank assets of $5,000 (with a known suspect) or $25,00 (no known suspect) or more, or transactions aggregating $5,000 or more that involve potential money laundering or a violation of the Bank Secrecy Act.. Reports must be filed on a uniform form adopted by the banking agencies – the Suspicious Activity Report ("SAR"). Reporting generally must occur within 30 days of discovering a reportable act.

Grist - actually the more pertinent part of the regulation calls for:

"Insider abuse involving any amount. Whenever the financial institution detects any known or suspected Federal criminal violation, or pattern of criminal violations, committed or attempted against the financial institution or involving a transaction or transactions conducted through the financial institution, where the financial institution believes that it was either an actual or potential victim of a criminal violation, or series of criminal violations, or that the financial institution was used to facilitate a criminal transaction, and the financial institution has a substantial basis for identifying one of its directors, officers, employees, agents or other institution-affiliated parties as having committed or aided in the commission of a criminal act regardless of the amount involved in the violation."


So regardless of the amount, if it involves an insider (and notice this is defined as any employee or agent of the bank, not the Reg O definition), you are required by law to file a SAR. So regardless of how you choose to handle the HR or criminal aspect, if you uncover kiting by an employee, you are required to file.

Thanks for the post. I like your response better then mine.

I feel the same. File a SAR, close the account, and fire the employee. The bank must maintain a zero tolerence for that.

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The bank must maintain a zero tolerence for that.

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I agree, otherwise the bank is opening itself up to future problems. Have to be proactive and show the employees that this sort of thing will not go unnoticed.

How do you prove kiting? I'm not exactly sure what to look for. If you look at an account that has cash deposits (or an electronic transfer) on the same day checks cleared that would put them into OD it's suspicious but...then what?

In the kites that I have dealt with, the checks that clear the same day are usually pretty close to the same amount as the deposits. Over time the dollar amount progessively gets larger.

When it comes to kites, the main thing to look for is a trend. If the customer has two or three suspect transactions a month, for 3 months (or longer), I'd be concerned.

Also, don't just look at one day's transactions. A smart kiter will spread his transactions over 2-3 days.

And, give special attention to a suspected kiter that's also a borrower. Our research has shown that more than 80% of kiters are also borrowers, and they're kiting to disguise their weak cashflow.

We have a system that helps identify and track kites. If'd you like to see a demo sometime via the Internet, please call or e-mail me.

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

Your should have a Suspect Kite report and a Drawings against uncollected funds report that is monitored daily. Important things to look for is a "float overdraft", chk/dep ratio, and activity vs. bal fluctuation . Someone who is good at kiting will very rarely become OD. Even if your bank gives immediate credit for deposits, the ability to accurately monitor float is important.

If you suspect a check kiting scheme, you should require holds on all future deposits. The only deterrent to a cash kite that I have found is requiring approval on all cash deposits to an employees account. They tend to be a little hesitant to do this if involved in this type activity.

Also, tellers are often the first to identify or suspect a kite scheme. When this happens review your suspect kite report to see if the account had previously been flagged. If it was not, your report parameters may need adjusting.

Wayne's advice is dead-on right. We had a $70,000 kite loss this year, and a $161,000 loan charge-off for the same customer.

And to make matters worse, the Justice Department tells us that they won't prosecute the woman involved, because her loan officer knew she was kiting. The four banks involed in the kite agreed to share the loss if things went bad. But when all was said and done, the other three didn't remember that part of the conversation.

Working the Kite Suspect list may work for very small banks. But the list at our bank ($160 millon in assets) averages 18 pages a day (primarily from sweep accounts and overdraft protection).

I'd like to hear from anyone using Wayne's system.

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But the list at our bank ($160 millon in assets) averages 18 pages a day

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I hate to say it - but you are a small bank. You apparently either don't have or don't have the ability to set the parameters of your suspect report correctly.

First line of defense as mentioned above is to listen to your tellers, they have hands on experience of what is normal vs unusual for their customers. Second, we monitor and record all activity on employee accounts each statement cycle. If you have an employee who normally has 4 credits a month and 25 debits a month and these numbers jump to 15 credits a month and 100 debits a month that is a red flag. If the checks being deposited are written from another account the customer owns (or even by using a third party) and subsequently checks are written from your account back to that account and on and on. Then there is the check cashing kite where your employee goes to the drug store, writes a check for goods and gets cash back and then deposits the cash before the check(s) come in. Look for activity within a small and confined amount of time.

As mentioned earlier, you don't want to be the one left holding the bag on this! If not an employee - place holds on all deposits and shut down the account if need be.