Where can I find a proper definition of "banking of funds" and what are the pertinent laws and regulations? Do you know of any articles that discuss it in terms of DoD contracting? I understand that it is illegal.
There is no official (or even common) definition of the term "banking of funds" as it applies to government contracting. We think you might be refering to a situation were money is obligated on a contract for a future purpose that is not a current need. The primary topic this type of activity falls under is "Contract Financing".
Depending on all of the facts: contract type, what appropriation (color of money) is being used, etc. yes it could be a violation of fiscal policy and law. Or it could be fine. We don't know enough here to say either way.
We highly suggest you talk with your contracting officer or someone else in your chain (or even the IG) if you suspect something nefarious.
While I almost never have a COR dive deeply into the Federal Acquisition Regulation; if you want to learn more about contracting financing, it is addressed in FAR Part 32.