Posted on 05/20/2007 8:19:03 AM PDT by Calpernia
May 15, 2007
NEWARK, N.J. — U.S. Immigration and Customs Enforcement (ICE) agents today announced the arrests of two men for allegedly masterminding a significant credit card fraud scheme that resulted in the loss of over $6 million to credit card lenders and banks nationwide.
On May 11, special agents from ICE’s Office of Investigations in Newark, N.J., arrested Akbar Wrind, a 54-year-old resident of Bayonne, N.J., and Rafael Marte, a 47-year-old resident of Walnut Port, Pa., for knowingly, willfully, and with the intent to defraud and conspire, obtaining things of value aggregating over $1,000.
"Had this scheme gone unchecked, it would have resulted in continued and significant losses for the banks involved," said Julie L. Myers, Assistant Secretary of Homeland Security for Immigration and Customs Enforcement. "Financial fraud results in costs that end up on the shoulders by law-abiding American citizens in higher rates and increased transaction fees."
ICE’s investigation revealed that in January 2004, the defendants conspired to establish lines of credit using false identification documents in the names of non-existent persons, according to court documents. The defendants allegedly used those fraudulent credit cards to obtain cash, merchandise, and other things of value with no intent to pay back the lenders.
The defendants allegedly leased properties in Union and West New York, N.J., as “drop addresses” for the fraudulent bills and cash payouts. Additionally, the defendants are alleged to have established companies that had no legitimate business purpose for a number of fraudulent purposes, including establishing credit card processing terminals and conducting fraudulent transactions with no intent to pay back the credit lenders.
The credit card issuers involved in this alleged scheme include Bank of America Corporation, Citibank, Discover, Chase, MBNA, First Union, Wachovia and Fleet.
This type of non-traditional money laundering crime is commonly referred to as a credit card “bust-out” scheme. Fraudulent credit cards are obtained for the sole purpose of removing all available credit and not repaying the lender. Commonly, criminals use false identification documents to create fictitious identities, or purchase credit portfolios from individuals leaving the country.
During the process of “busting out” accounts, the group will inflate the credit line they have created, and can at times double the amount of available credit through a process known as “check-kiting.” In this process, checks are written with insufficient funds, but credit limits are extended before the bank transaction is completed.
The Newark office of the United States Attorney for the District of New Jersey is prosecuting the case.
“Citibank would like to thank the ICE special agents for their persistence in this extremely complex financial fraud case,” said Dick Boland, a representative of Citigroup investigative services. “It is only due to the professionalism and determination of ICE that we were fortunate to have a successful outcome of this difficult case.”
In Fiscal Year 2006, ICE initiated more than 3,970 financial investigations that resulted in the seizure of roughly $137 million in currency and monetary instruments, as well as the arrest of 1,262 individuals, 936 indictments and 940 convictions.
-- ICE --
About Check Kiting
Check kiting is generally considered a process whereby a person with a checking account in two banks can create an illusion of money in his account. A check drawn on the first bank is deposited with the second bank. Before the check reaches the first bank for payment, a check drawn on the second bank is deposited to the first bank. If the bank is willing to give immediate credit in the interim, the person can use the bank’s money without first providing collateral and without paying interest. This scheme can go on as long as the person keeps depositing checks in both banks and both banks believe there is money behind the checks. See First Texas Savings Ass’n v. Reliance Ins. Co., 950 F.2d 1171, 1173, n.1 (5th Cir. 1992); Calcasieu-Marine Nat’l Bank v. American Employer’s Ins. Co., 533 F.2d 290, 294, n. 3 (5th Cir. 1976), cert. denied, 429 U.S. 922 (1976). Another court described check kiting as a scheme designed to separate the bank from its money by tricking it into inflating bank balances and honoring checks drawn against accounts with insufficient funds. See United States v. Frydenlund, 990 F.2d 822 (5th Cir. 1993).
Another more simple definition of check kiting is “the passing of checks between two or more banks to obtain unauthorized credit from each bank during the time it takes the checks to clear.” Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183, 191 (5th Cir. 1990); Mitsui Mfgrs. Bank v. Federal Ins. Co., 795 F.2d 827, 830, n. 2 (9th Cir. 1986); Bay Area Bank v. Fidelity & Deposit Corp. of Maryland, 629 F.Supp. 693, 695, n. 3 (N.D. Cal. 1986); see also, Williams v. United States, 458 U.S. 279 (1982) (“[T]he check kiter can take advantage of the several-day period required for the transmittal, processing, and payment of checks from accounts in different banks.”).
In defining check kiting as a species of fraud consisting of the exchange of checks of approximately the same dates and amounts between two banks for the purpose of obtaining money, one court explained:
It is a process where checks written on one account are continually covered with deposits of checks written on another account, thereby creating positive statement balances and preventing overdrafts but resulting in steadily decreasing deficit in the collective balance in most of the accounts. [Citation omitted]. Check kiting necessarily involves two or more accounts.
Ortiz v. San Antonio City Employees Credit Union, 974 S.W.2d 833, 836 (Tex. App.— San Antonio, no writ).
Check kiting is a dangerous threat to banks. As one commentator observes:
One of the greatest threats to depository institutions is the check-kiting scheme. The bank left in the overdraft position will usually suffer substantial loss, particularly because the kiting risk is normally not covered by the bank blanket surety bond.
1 Barclay Clark & Barbara Clark, The Law of Bank Deposits, Collections and Credit Cards ¶ 9.01 (rev. ed. 2000) [hereinafter “Clark”]. In addition to creating a civil problem for banks, check kiting is a crime prohibited by federal law. 18 U.S.C § 1344. Thus, individuals who perpetrate a check kite are frequently prosecuted and sent to prison. That often does not help the banks that are left with a loss after the check kite collapses.
Banks often unintentionally create the opportunity for a kite by granting immediate credit on depository items. While banks claim that a depositor will not get immediate credit on items deposited for several days, banks frequently give immediate credit to the depositor on those items. Since a kite is a type of fraud by which the kiter uses at least two accounts at different banks, the kiter covers overdrafts on one of the banks by drawing checks on the other bank. In doing so, the kiter creates fictional balances at both banks – that is, balances based on the granting of immediate credit on items of deposit which are, in fact, not represented by real funds. The kiter can do this by taking advantage of the “float” period between the time of deposit and the time of the actual payment by the drawee bank. This opportunity is available to the customer because the banks are willing to grant immediate credit on deposit items and allow withdrawals against uncollected funds, as authorized by UCC Article 4 and Regulation CC (12 C.F.R. pt. 229). See Clark, ¶ 9.01.
The kite usually continues until one of the two or more banks discovers the kite and returns, unpaid, checks drawn on it (for which the other bank has granted immediate credit upon the deposit thereof). At this point, the kite collapses. Usually, the bank that first discovers the kite will successfully shift the entire loss to the other bank. It does this by remaining silent about its discovery, and while sending the items deposited at it for collection, refuses to pay items drawn on it which were deposited at the other bank. The discovering bank hopes the other bank will not discover the kite in time to return items by the midnight deadline. As one commentator noted, the bank that loses in a kite is the bank that, relying on uncollected deposits, holds checks drawn on it beyond the midnight deadline. See Clark, ¶ 9.01.
Whether the discovering bank owes duties to the other banks in the kite, such as to inquire further and notify each other of suspicions of kiting, is beyond the scope of this article. The majority rule seems to be that if each bank in a kiting situation is merely trying to protect itself, it has no duty to advise the other bank of its suspicions and the discovering bank can act to protect itself – even if this has the effect of shifting the entire loss to the other bank. Clark, ¶ 9.03; Alta Vista State Bank v. Kobliska, 897 F.2d 930 (8th Cir. 1990); Citizens Nat’l Bank v. First Nat’l Bank, 347 So. 2d 964 (Miss. 1977). One jurisdiction, however, seems to suggest that the discovering bank may act in bad faith when it stops payment on items drawn on it while at the same time trying to collect items deposited at it. See, Community Bank v. United States Nat’l Bank, 555 P.2d 435 (Or. 1976). A finding of bad faith may be the basis to impose liability upon the discovery bank.
Check kiting schemes are usually accompanied by certain predictable account activity. There is usually sudden increased activity in the account when the kite begins. There are wild fluctuations in the balances in the involved accounts. There is a steady increase in the amount of deposits. Sometimes the withdrawal and deposits are very similar in amount. Sometimes the withdrawals and deposits are in an identical amount. Clark, ¶ 9.01. Other warning signs include frequent daily negative balances or overdrafts that are covered in a short time frame, frequent check withdrawals to the same institution, and deposit volume that is inappropriate in relation to the nature of the depositor’s business. See Clark, ¶ 9.09[3].
Because of these patterns and warning signs, kite-detection software is available to banks. This software detects the usual patterns of kiting and reflects that suspicious activity in reports designed to be reviewed by bank officers. These reports frequently result in the early detection of check kites and the shifting of loss by the discovering bank to the other involved banks.
Unfortunately, many banks still do not use this kite detection software.
Ping......
Facinating.
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