First, we note that because you can identify the customer suspected of check kiting, you are required to file a suspicious activity report if the suspected violation or pattern of violations aggregates $5,000 or more.

In addition, because you suspect that your customer is engaged in check kiting, you have reasonable cause to place a hold on deposited funds. Such a hold will protect your institution and give you time to investigate the potentially illegal activity. If you do place a hold on deposited funds, you must provide the customer with a written notice, which need only disclose that the hold is “based on confidential information that the check may not be paid.” Placing a hold and sending the required notice also may deliver the “warning” you want.

If you choose to also send the customer a warning letter, we found sample language online that may be useful, but we strongly recommend reviewing this language with bank counsel before sending it to your customer. 

“Dear Customer:

We have noted unusual activity recently in your ____ Bank deposit account # _________. Specifically, we note frequent deposits and drawing of checks between accounts at two or more banks. This activity, if done for the purposes of benefiting from the float it creates, is a prohibited activity. Be forewarned that we may, at our option and without warning, close your account if we believe such continued activity creates a risk of loss to us.

We will closely monitor your account’s activity over the next few days and weeks. If you have any questions about this matter, please contact us.

Sincerely,”

For resources related to our guidance, please see:

• Regulation CC, 12 CFR 229.13(e) (“Sections 229.10(c) and 229.12 do not apply to a check deposited in an account at a depositary bank if the depositary bank has reasonable cause to believe that the check is uncollectible from the paying bank. Reasonable cause to believe a check is uncollectible requires the existence of facts that would cause a well-grounded belief in the mind of a reasonable person….”)

• Official Interpretations, Regulation CC, 12 CFR 229, Paragraph 13(e), Comment 2(d) (“There are reasons that may cause a bank to believe that a check is uncollectible that are based on confidential information. For example, a bank could conclude that a check being deposited is uncollectible based on its reasonable belief that the depositor is engaging in kiting activity. Reasonable belief as to the insolvency or pending insolvency of the drawer of the check or the drawee bank and that the checks will not be paid also may justify invoking this exception. In these cases, the bank may indicate, as the reason it is invoking the exception, that the bank has confidential information that indicates that the check might not be paid.”)

• FDIC Compliance Manual, Expedited Funds Availability Act, page 7 (“If a hold is placed on the basis of confidential information, as when check kiting is suspected, the depository bank need only disclose to the customer that the hold is based on confidential information that the check may not be paid.”)

• BankersOnline.com Discussion Forum: Check Kiting

• 12 CFR 353.3(a)(2) (A bank must file a suspicious activity report to FinCEN “[w]henever the bank detects any known or suspected federal criminal violation, or pattern of criminal violations … involving or aggregating $5,000 or more in funds or other assets, where … the bank has a substantial basis for identifying a possible suspect or group of suspects.”)