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Notifying Other Institutions Of Suspected Kiting

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Question: 
We suspect a customer of check-kiting. There are other financial institutions involved. Do we have to make them aware of the situation? Are we ever required to tell them anything? We are maximizing the hold times on the items we process. Is this enough to limit our risk?
Answer: 

Kiting is like a game of "musical chairs;" when the music stops, someone (the last bank to figure it out) will not have a place to sit down and will take the loss. While I try not to be a reactionary, this is one area where half-measures greatly increase your risk of loss; act promptly and decisively.

If you believe a customer is kiting, investigate immediately and make a decision, "yes" or "no." (Unless you are watching for the mushroom cloud, do not just put a "watch" on the account.) If you determine they are kiting, place holds on all recent deposits to the extent allowed by law, sending the appropriate notices to the customer.

If you call the drawee banks regarding funds availability on recently deposited checks, you may be able to establish "reasonable cause to doubt collectibility" on some of them and be eligible for longer "exception" holds. However, by contacting them you may simultaneously alert them to the problem. Be discrete.

As suggested above, you are under no obligation to tell the other bank about the problem. The phrase, "Every man for himself," was coined by seafarers, but (adjusted for gender) may apply to bankers too. As kiting is a federal crime (bank fraud), making the accusation to anyone other than law enforcement is questionable unless both institutions have registered with FinCEN to share information. (That registration may not apply in this situation as the issue is not money laundering or terrorism.)

Perhaps more to the point is the fact that making the other bank aware of the problem may enhance your bank's losses.

When you have your holds in place, take steps to terminate the relationship. It should be done in writing and allow the customer enough time to make deposits to cover all outstanding checks. Explain that the customer should
*not write any more checks,
*make deposits only to cover checks already written,
*make all future deposits in cash, and thatyour bank
*has the right to refuse any future item offered for deposit and
*will place the maximum holds allowed by law on any item it accepts for deposit.

The reason given for terminating the account should be as accurate as possible, short of accusing the customer of a federal felony. "Repeatedly writing checks against uncollected funds" may be a workable euphemism. (This letter should be a form letter reviewed by bank counsel - it should rarely be the subject of rewording by the person who sends it.)

Now that you have done everything you can to protect your institution, aggregate the amounts involved. If you are above the financial thresholds for SAR filing, start to work on your report.

First published on BankersOnline.com 12/2/02

First published on 12/02/2002

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