The Big Con: No Matter the Form, Easy Money Is Still a Fraud

by
Jane L. Johnson
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P.T. Barnum purportedly proclaimed that “There’s a sucker born every minute”, though there is no proof that he actually said it. Whether true in Barnum’s time or in today’s social-media era, however, the phrase describes those gullible enough to believe anything, even when their better judgment (if they possess any of that) tells them otherwise.

Now comes a story about TikTok, where 40 percent of young adults get their news these days. Recent news sources report TikTok videos portraying people believing they could get “free” cash from Chase Bank ATMs. These videos showed people depositing checks for large sums of money at Chase ATMs, and then making withdrawals for smaller yet substantial amounts, leading them to believe they had discovered a computer glitch to take advantage of. One video viewed over 100,000 times shows a young woman calling her mother and telling her she could get $40,000 to $50,000 out of her Chase account by depositing a check and taking advantage of the “glitch.”

Chase normally allows customers to withdraw a portion of deposited checks before the full check amount clears, but a technical error allowed customers to withdraw all of the funds from a check before it had cleared. Chase says that this error existed for a few days before being quickly fixed.

If this sounds like fraud, it is. Such schemes in earlier times were called “check-kiting”, when someone takes advantage of bank float to make use of non-existent funds. It has been illegal by both state and federal law for many years. Check-kiting is much less common today than in prior times----not because bank customers are more law-abiding today but because the elapsed time from check deposit to check clearance has become significantly shorter over time.

Bank Float May Offer Opportunity for Check-kiting

In earlier times a $100 paper check drawn on a New York City bank, for example, then deposited in a San Francisco bank, could take a minimum of three to five days via rail to reach the New York bank for clearance and collection---and sometimes even longer depending on transportation and weather conditions. During this check clearance process the $100 shows in the accounts of both the New York check writer and the San Francisco check recipient.

In the meantime, the San Francisco bank may have credited the recipient’s account for the $100 before the check actually cleared the New York bank, This gives the San Francisco bank account-holder the opportunity to make use of funds that he does not in fact actually possess yet. This explains why banks many years ago realized the need to place holds on funds availability in order to prevent check-kiting.

This elapsed time between the check’s deposit at the recipient’s bank and its clearance at the check writer’s bank is called “bank float”, and the $100 is double-counted during that time. When the US Post Office upgraded its service from rail to air transport, bank float decreased significantly, but it still existed.

Historically most check-kiting occurred between banks in the same town or nearby, as in the TikTok videos case. Bank float exists in this case, although the elapsed clearance time is much shorter than that in the New York-San Francisco example. 

To further reduce bank float, in 2003 Congress passed and President George Bush signed the Check 21 law that further reduced both check clearance time and the possibility of check-kiting. This law made numerous changes in check processing: all check clearance is now effected electronically, most checks clear overnight, original checks are no longer physically transported from one bank to another, and bank customers no longer routinely receive their cancelled checks with their monthly bank statements.

Possible Implication of TikTok’s Chinese Ownership

Given TikTok’s ownership by China-based ByteDance Ltd., one can wonder if the videos were planted to mislead and confuse a young American social-media mavens into thinking that they had found a new way to obtain free money. If so, it would not be the first time that enemy nations have tried to damage the economies of other countries.

During World War II Nazi Germany, perhaps recalling the economic chaos of their own country’s hyperinflation of the 1920s, proposed air-dropping large quantities of counterfeit British bank notes over England to undermine the value of genuine currency and destabilize the UK economy. According to the story, Hitler intended to use the chaos caused by such a scheme as the cover for his planned UK invasion. The plan was called Operation Bernhard, employing slave labor in concentration camps, including some who had been imprisoned for forging bank notes. By the time the notes were ready to air-drop over Britain, however, Germany lacked the necessary aircraft to complete the scheme, and it was never implemented.

Could Central Bank Digital Currency (CBDC) Avert Check-kiting Fraud?

The bank check payment system has survived for many decades, but the volume of check-writing has declined significantly in recent years as credit and debit cards, as well as e-commerce payment systems, have gained popularity and acceptance for business and personal transactions. Following the improved check clearance resulting from the 2003 Check 21 legislation, the Federal Reserve district banks have reduced the number of their paper check-processing offices from forty-five in 2003 to only a single office in 2010. 

Now countries around the world are beginning to consider Central Bank Digital Currency (CBDC). If implemented in the United States, CBDC would presumably make everyone a banking customer of the Federal Reserve system, a dramatically different arrangement than ever seen in this country because the Fed has never served as a bank to the public. CBDC would presumably create Fed bank accounts for every American.

The case for CBDCs is that they function in similar ways to fiat currencies while adding some benefits of digital or cryptographic currency. To date, only four CBDCs (those of Zimbabwe, Nigeria, the Bahamas, and Jamaica) have been officially launched, though a number of others are in a pilot or development stage.

Some advocates claim that CBDCs may assist in fraud prevention. One proposal involves releasing funds from payments only after specific criteria are met. Aside from slowing down payments, imposing holds on credit availability, and enhancing authentication, no simple and effective solution has been introduced so far. Concerns about privacy, moreover, continue to haunt discussion of CBDCs, since a nation’s central bank would be privy to everyone’s expenditure patterns.

Resolution of the TikTok Chase ATM Scheme

Within moments of the TikTok video story’s breaking, Chase Bank alerted customers and the general public that the free money scam was not a glitch, but rather fraud pure and simple, and that perpetrators would be prosecuted to the fullest extent of the law.. Chase continues to investigate the scam and the extent of its losses, but has released no further news aside from announcing that the error has been fixed. Thus the story may remain simply another example of the old adage that “If it sounds too good to be true, it almost certainly is,” a lesson that the TikTok generation must learn sooner or later.

No Comment on the Glitch from State or Federal Bank Regulators

Aside from Chase Bank itself, no other banks or bank regulators---The Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, Consumer Financial Protection Bureau, and the fifty separate state banking commissions---have mentioned the Tiktok incident.

Nor has the Federal Reserve spoken, though doing so would be appropriate from the regulator of the one-bank holding company JPMorgan Chase, a publicly-traded firm, which owns the federally-chartered JP Morgan Chase Bank and several other financial subsidiaries.

But one may wonder at the Federal Reserve’s perspicacity in these matters. Recall that the Federal Reserve, after calling inflation merely “transitory” in 2022, then belatedly taking action to significantly raise short-term interest rates, now believes that it has conquered inflation and thus can justifiably reduce those rates. Perhaps Federal Reserve policymakers would have the TikTok generation consider kiting-like episodes as quirky transitory events that occasionally offer entitlement-like opportunities for free money---at least until subsequent generations of Americans then discover that those new opportunities are also too good to be true.