Check out the Indy Star article, it details exactly how this guy got away with it. Also, the check-kiting was going on in 2001, well before the new Check-21 rules were put in place that speeded up the process.
The truth I believe is they really didn't want to know because if they stopped it they would be the ones to lose both the money and probably their jobs. They turned their heads hoping it would go away of the other banks would take the hit.
The biggest clue is the frequency and volume of checks. Imagine being at the bank and your customer who ordinarily deposits a million per month is now depositing 6 million per day.