By Gina Tabonares
Variety News Staff

IT WAS Bank of Hawaii that first sued Bank of Guam over an alleged check-kiting scheme.
Bank of Hawaii sued Bank of Guam on March 27. A few days later or on April 11, Bank of Guam filed a lawsuit against Bank of Hawaii.
The Honolulu-based bank initiated a complaint before the District Court of Hawaii asking Bank of Guam to pay for damages.
Bank of Hawaii attorneys Katherine G. Leonard and John P. Dobrovich Jr. filed the case against Bank of Guam on March 27, while Bank of Guam filed a similar complaint on April 11 before the District Court of Guam.
The two banking lawsuits were the result of an alleged check-kiting scheme involving Jale Management’s Information and Data Services, or IDS, which debited more than $2 million from its Bank of Guam account.
IDS provides payroll services to employers like Hilton Guam Resort and Spa, and Dewitt Transactions. It also forwards taxes withheld from employees to the appropriate taxing authorities on behalf of its employer-clients.
Check kiting is a form of fraud that involves depositing and withdrawing funds between accounts with different banks and thereby taking advantage of the “float” time.
Float time is the time it takes the bank of deposit to collect from the paying bank.
Check kiting attempts to obtain funds that are not actually in the account of the paying bank, before the lack of funds is detected.
Under Federal Bank Fraud statute, check kiting is a criminal offense.
The Bank of Hawaii complaint confirmed that the IDS former controller was investigated by Federal Bureau of Investigation agents and bank officials on Oct. 12, 2006.
The former IDS controller described the ongoing check-kiting scheme at IDS and the efforts of Bank of Guam since August 2006 to obtain information about suspicious activity at IDS.
According to the former IDS employee, Bank of Guam advised the payroll company on Oct. 3, 2006 that it had detected suspicious activity on the part of IDS and IDS would not be allowed to continue bank transactions with checks and automated clearing house debits to and from Bank of Hawaii.
The IDS transactions involved the transfer of funds to the IDS accounts at Bank of Guam by debiting the IDS accounts at Bank of Hawaii at a time when those accounts did not contain sufficient collected funds to tcover all of the debits.
Under the Automated Clearing House Rules, according to Bank of Hawaii in its complaint, Bank of Guam as the Originating Depository Financial Institution or ODFI for the IDS provided specific warranties to Bank of Hawaii as the Receiving Depository Financial Institution or RDFI.
According to Bank of Hawaii, one these warranties were that Bank of Guam had received an acknowledgement from IDS that it would not initiate transactions that violated the Automated Clearing House Rules or the laws of the United States.
Bank of Hawaii contended that as a result of Bank of Guam’s knowledge of the check-kiting scheme before and at the time the IDS transactions were originated, Bank of Guam knew or had reason to know that the IDS transactions violated the laws and therefore could not, in good faith, give the warranty it owed to Bank of Hawaii under the Automated Clearing House Rules.
The Bank of Hawaii complaint further stated that Bank of Guam waited until all of the IDS transactions had been completed before advising Bank of Hawaii of IDS’s check-kiting scheme even though Bank of Guam knew of or suspected the scheme much earlier.
It stressed that the IDS transactions were returned by Bank of Hawaii on Oct. 13, 2006.
Bank of Hawaii attempted to obtain a written statement under penalty of perjury from IDS President Romy Miclat, who refused to provide statement, invoking his Fifth Amendment rights through a lawyer.
Bank of Hawaii confirmed that it received a credit from Bank of Guam in the amount of $2,273,905.59 and applied the credit to offset the overdraft positions in the IDS accounts at Bank of Hawaii.
The amount of $143,067.34 remained after the offsets, and the amount is currently held by Bank of Hawaii in Honolulu.
It said that the National Automated Clearing House Association in Herndon, Virginia determined on March 26, 2007 that Bank of Hawaii violated the Automated Clearing House Rules because the affidavit submitted in support of the return code used to return the IDS transactions did not comply with the technical rule requirements for a statement.
However, Bank of Hawaii argued that the NACHA panel did not address whether Bank of Guam breached its warranties to Bank of Hawaii as the sole issue addressed was the matter of Bank of Hawaii’s technical compliance with the return code rule requirements.
Bank of Guam demanded payment of the $2.2 million of the IDS transactions but Bank of Hawaii has not made any payments.
Instead, Bank of Hawaii asked the District Court of Hawaii to resolve the dispute between them and Bank of Guam.
Bank of Hawaii insisted that at the outset of the IDS transactions, Bank of Guam was in breach of its express warranties and must therefore bear the risk of loss on the transactions through its indemnification obligations set forth in the Automated Clearing House Rules.