Check kiting is a form of fraud involving the sloshing of theoretical funds between two bank checking accounts. A check written to the criminal from one bank is deposited, and more importantly credited, to an account at a second bank. Because that second bank now shows a positive balance, the criminal can withdraw enough money to deposit back into the first bank before the check bounces for lack of funds.
This form of check kiting may seem to be too complicated for such a small payoff, but sloshing the funds back and forth between accounts can buy the criminal enough time to generate real money to cover any other outstanding checks. Some people have been known to use this method, called circular check kiting, when several checks on an overdrawn account may come due before a paycheck or other regular funds can be deposited. The circular check kiting scheme depends on the bank's delay between receipt of deposits and checks and their eventual processing, also known as "float time."
Some people who find themselves short on funds may resort to writing a bad check in anticipation of a deposit during the float time. While this in itself is an illegal act, the chances of getting caught by the bank or prosecuted by a retailer are fairly slim. A professional check kiter, also known as a paper hanger, is more motivated by personal gain than economic survival, however. A professional check kiter will continue to slush funds between accounts until he or she is caught by the law or a bank catches onto the scam.
There is another form of check kiting which involves the unwitting participation of a third party. A "paper hanging" customer may make a very small purchase and pay for it by check. Because grocery stores often allow customers to overwrite a check for additional cash, the check may be written for the maximum amount allowed. Funds from a second account may be sloshed over to cover the amount of the check, but the cash remains in the custody of the dishonest customer.
The illegal practice of check kiting may have met its match in modern technology, however. Most banks now use an electronic receipt system which instantly records and in many cases processes cash transactions. This technology have essentially eliminated or reduced "float time" between banks. It is now much more difficult to withdraw funds from one bank and deposit them in another before the two banks can compare transaction records. Without significant float time, check kiting schemes have become too risky for many professional paper hangers and con artists.