AL 96-6
Subject: Check-Kiting, Funds Availability, Wire Transfer Activity

TO:  Chief Executive Officers of All National Banks, Department
     and Division Heads, and all Examining Personnel


PURPOSE

The Office of the Comptroller of the Currency wants to ensure
that all national banks prudently manage the risks posed by
fraudulent activity involving the use of illegal check-kiting
schemes, and to provide useful information to help bank
management identify and prevent potential deceptive practices.

BACKGROUND

The OCC has become aware of instances where banks have incurred
significant losses through elaborate schemes to draw against
uncollected funds.  Typically, the banks most susceptible to this
type of fraud do not have proper internal controls and reporting
systems to monitor this and other suspicious activity, or have
failed to properly enforce internal procedures that already
exist.  In addition, liberal practices regarding funds
availability and wire transfer activity further increase the
potential for loss.

SUMMARY

Check-kiting may occur in various ways, and involve numerous
financial institutions.  The underlying premise is the customer's
ability to gain access to deposited funds before they are
collected from the institution on which they are drawn.  Often,
exceptions to sound internal controls for approving drawings
against uncollected funds, overdrafts, and wire transfers become
a routine practice in many institutions.  Since these exceptions
do not frequently involve fraud or translate to losses, it
becomes easy for bank employees and management to overlook the
risks involved.

To combat check-kiting, the board and senior management need to
ensure the effectiveness of internal controls used to identify
suspicious activity and minimize risk.  While fraudulent conduct
cannot be detected or prevented in every case, there are certain
minimal controls that should be implemented to reduce the
likelihood that a check kite will go undetected.  The types of
internal controls which banks should consider include:

o    Officer approval on drawings against uncollected funds,
     overdrafts, and wire transfers.  Such authority should be
     strictly enforced and not exceed an individual's lending
     authority.

o    Daily reports on drawings against uncollected funds,
     overdrafts, large items, and significant balance changes. 

o    Designated individual to regularly review internal reports
     to spot anomalous conduct and to ensure proper investigation
     when warranted.

o    Secondary level of administrative control that is distinct
     from other lending functions to promote objectivity when
     granting significant drawings against uncollected funds or
     overdrafts.
     
o    Regular overdraft activity reports to the board or an
     approved committee thereof.

o    Periodic review through an independent audit function to
     assess and report on the adequacy of all established
     internal controls in this area.
       
In addition, although banks are required to adhere to the time
frames on availability of funds established by Regulation CC, 12
CFR Part 229, bank management should also be aware of the
regulation's exceptions to the normal availability schedules and
use those exceptions as circumstances require.  See 12 CFR 229.13
and related commentary at Part 229, Appendix E.

With proper controls, banks will increase their ability to flag
suspicious activity.  Although not all questionable conduct is
the result of fraud, the board and senior management should
recognize potential warning signs and monitor such conduct to
help identify possible illegal activity.  Examples of suspicious
circumstances which may indicate a check-kiting scheme include: 

o     Several accounts with similar names, owned or controlled by
     the same individuals.

o     Regular or excessive drawings against uncollected funds.

o     Frequent daily negative ending balances or overdrafts that
     eventually clear or are covered in a short time frame. 

o     Identifiable patterns of transactions such as deposits,
     transfers between accounts,     withdrawals, and wire
     transfers, often with similar or increasing amounts.

o     Deposits of large checks drawn on out-of-area banks or
     foreign banks.

o    Frequent requests by the customer for account balances,
     collected items, or cleared items.

o    Frequent, large deposits drawn on the same institution.

o    Deposits drawn on other institutions by the same maker or
     signer.

o    Large debits and credits of even dollar amounts.

o    Frequent check withdrawals to the same institution, with the
     maker listed as payee.

o    A low average daily balance in relation to deposit activity.

o    A low collected fund balance in relation to the book
     balance. 

o    A volume of activity or large debits and credits
     inappropriate in relation to the nature of the business of
     the account holder involved.

There is no absolute safeguard against check-kiting or any other
type of bank fraud, but there are account activities which can
signal the need for greater scrutiny.  Establishing adequate
controls to identify such activity and periodic review and
assessment of those controls is fundamental to minimizing the
bank's potential risk of loss.

Any bank that becomes aware of activity that suggests the
existence of a check-kiting scheme, or is otherwise suspicious,
should file a suspicious activity report (SAR) in accordance with
12 CFR 21.11.  See OCC Bulletin 96-19, March 15, 1996, and its
attachment. 

Questions concerning this advisory may be directed to the
portfolio manager responsible for your bank or the OCC's
Enforcement & Compliance Division at (202) 874-4800.




                                 
Daniel P. Stipano
Director
Enforcement & Compliance Division
Date:     August 6, 1996