In the 2002 movie “Catch Me If You Can”, Leonardo DiCaprio played a top con man who defrauded many banks with fake checks - that was in the 1960s.
Six decades later, the check fraud is still live and large, as illustrated by the StateView Homes/TD incident.
What is check-kiting?
📌 An accountholder maliciously makes a large payment to the checking account or credit card account.
📌 But there are not enough funds to back the payment, or in this case, the checks get canceled.
📌 An unsuspected bank releases the open-to-buy (available fund or credit) right away, not knowing that the payment will eventually be returned.
📌 The fraudster quickly withdraws the funds. Days later, the payment gets returned and the account is left with a big hole.
Understanding business accounts receive less restrictive treatments given their large volumes of transactions, it still intrigues me how the loss became as high as $37M.
How to mitigate check-kiting?
📌 By analyzing recent payment behaviors such as recently reversed payments vs. payment velocity, a bank can segment out payments with a high fraud risk.
📌 High-risk payments can be “floated” - holding the funds or credit for a few days until the payment is settled. Ultra-high-risk accounts can be blocked and subject to manual fraud review.
📌 The upcoming real-time payment scheme would help reduce such incidents.
📘 Check kiting is introduced in 𝑪𝒉𝒂𝒑𝒕𝒆𝒓 15 𝑭𝒓𝒂𝒖𝒅 in my book 𝑼𝒏𝒔𝒆𝒄𝒖𝒓𝒆𝒅 𝑳𝒆𝒏𝒅𝒊𝒏𝒈 𝑹𝒊𝒔𝒌 𝑴𝒂𝒏𝒂𝒈𝒆𝒎𝒆𝒏𝒕.
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