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Take a chance on lottery at your bank?

Q&A: Ins and outs of banks and lottery events

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  • By  Leslie Callaway, ABA Center for Regulatory Compliance
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  • Comments:   comments
Take a chance on lottery at your bank?

The ABA Center for Regulatory Compliance regularly receives emails and calls from our members asking about the permissibility of  holding a drawing or a lottery.

Generally, the marketing department, loan department, or even the investment area wants to encourage customers to open an account, sign up for a new product or service, or meet with a loan officer or investment representative.

A prize drawing seems like an attractive way to entice people to participate. However well-intentioned or clever the idea—it  can be a problem.

The reason? Federally regulated banks are prohibited from participating in lotteries.

Getting down to details

Under federal law, banks may not “deal in lottery tickets.” They may not “deal in bets used as a means or substitute for participation in a lottery” nor “announce, advertise, or publicize the existence of any lottery.” Nor can they “announce, advertise, or publicize the existence or identity of any participant or winner, as such, in a lottery.”

In addition, a bank may not permit “the use of any part of any of its banking offices by any person for any purpose forbidden to the bank” under the statute, and may not permit “direct access by the public from any of its banking offices to any premises used by any person for any purpose forbidden to the bank” under the statutes. Criminal penalties are provided for any person who knowingly violates these provisions.

A “lottery” is defined as including:

“Any arrangement whereby three or more persons (the “participants”) advance money or credit to another in exchange for the possibility or expectation that one or more but not all of the participants (the “winners”) will receive by reason of their advances more than the amounts they have advanced, the identity of the winners being determined by any means which includes

(A) a random selection;

(B) a game, race, or contest; or

(C) any record or tabulation of the result of one or more events in which any participant has no interest except for its bearing upon the possibility that he may become a winner.”

(Some specific cites for you: See the OCC’s National Bank Act at 12 U.S.C. § 25a; the FDIC’s Federal Deposit Insurance Act 12 U.S.C. 1829a(e), and the Federal Reserve’s Federal Reserve Act 12 USC 339. Section 410 of the National Housing Act of 1934, 12 USC 1730c, prohibits SAIF-insured institutions from dealing in lottery tickets. The Home Owner’s Loan Act, 12 USC 1463(4)(e), prohibits federal savings associations from dealing in lottery tickets.)

Understanding what is prohibited can be complicated, and sometimes confusing. In order for a contest to be a lottery, a participant must be required to give up something of value (consideration) in order to participate. If a person can participate for free, then the contest is a drawing and not a lottery and is generally permissible. 

What is and isn’t a lottery?

So what is "consideration"?

Generally it is money, such as paying a dollar for a lottery ticket.

In a banking context, it can also be that the person must open an account, sign up for a service (such as online banking) make a deposit, or apply for a loan. To keep a contest, lottery, or sweepstakes from being prohibited, individuals must never have to pay to enter, and purchasing a product or opening an account cannot improve their odds.

For example, let’s say your mortgage department devises a promotion to obtain new mortgage loans. The promotion says that everyone who applies for a mortgage loan and is approved has their name entered in a drawing for new dining room furniture.

That is a lottery. The reason? To get their name in the drawing, the applicants must give up something of value: in this case, the cost of applying for and closing a loan.

On the other hand, if the loan department provides a reasonable alternate method of entering the drawing that does not require participants to give up something of value, it becomes permissible because there is no “consideration” and opening an account or taking out a mortgage is not required.

For example, if all persons who apply for a mortgage loan are automatically entered but anyone else who wants to enter may do so by submitting a postcard entry or going to the bank’s website to enter, this is not an impermissible lottery. 

The bank can also give a small gift to every customer who opens a new account or applies for a loan because there is no element of chance. 

Questions and answers on lotteries

The lottery rules are very specific and violation can have serious consequences for your bank. In addition, even if what the bank is doing is legal under federal law, many state lottery laws address licensing, advertising,  taxation, prize announcements, reporting, and record-retention requirements.

Banks should ensure that all employees are aware of the lottery rules—particularly those employees who design promotions to attract new customers or to increase existing customers’ use of bank services.

To illustrate more clearly when bank events are acceptable or prohibited, here are various examples in the form of questions and answers.  

An innovative—and illegal—two-step offer

Q 1. Our marketing team has proposed a new mortgage awareness/referral campaign. The plan is to provide frontline staff with a brochure that discusses mortgage rates and information. At the bottom of the brochure is a tear-off card with a pull-tab. On the back of the card is an entry slip that the customer must fill out in order to be considered for two possible prizes: one, which is the amount revealed on the pull tab and a second, large cash prize. To be eligible for the smaller, pull-tab reward, the customer need only complete the form,  pull off the tab and claim the prize. The completed form is then passed on to our mortgage team as a possible lead generator. Anyone can enter.

To be considered for the larger prize, however,  the customer must meet with a mortgage loan officer and apply for a mortgage. Customers who complete the entry slip and apply for a mortgage loan are considered for the larger prize. Do you see any issues with this? 

A. Yes. A lottery is defined as a chance to win a prize where consideration is paid by the entrant for the chance to win.

The small-dollar reward designated on the pull-tab is not a lottery because anyone may fill out the form and enter and anyone who enters is eligible to win without purchasing a product or applying for a loan.

The issue comes with the larger prize, which is available only to those who actually apply.  In this case, the mortgage application is “consideration” and this violates federal law. However, if the drawing is open to anyone regardless of whether they meet face to face with a loan officer and there are no stipulations to “enter” other than filling out the form, then there is nothing impermissible about it and you should be fine.

(Note: You should always check your state law for rules concerning any kind of drawing. State laws generally stipulate how the drawing must be advertised and how winners must be announced.)

Cash Cube Conundrum

Q 2. We have a Banking Center Manager who will have a booth at the home and garden show for which we will have a “Cash-Cube.” That’s an enclosed box that blows money around—participants are allowed to grab as much money as they can in a given period of time.

The money they grab is theirs to keep, with one exception. The requirement for participants to have a chance inside the cube is that they open an account with our bank. From the money they obtain inside the machine they must use at least $25 of it to open this account.

Can we do this?

A. No, this is an illegal lottery and you CANNOT do this. This is a “game of chance” whereby participants “pay” (“payment” here is the requirement to open at account in order to “win”). The only way it is permissible is if there is no requirement to open an account or to be a customer of your bank. See the FDIC rules, Sec. 20. Participation By State Nonmember Insured Banks In Lotteries And Related Activities

No prize drawing for bill pay accounts

Q 3. Our Marketing Department is looking to advertise the following campaign: every new bill pay account activated will be entered into a drawing; the selected winner will receive a Visa Gift Card for $250. Can we do this?

A. No, because it restricts  eligibility to win to a segment of customers, e.g., only customers who have online bill pay or activate online bill and excludes non-customers and customers without online bill pay.

This is an impermissible or illegal lottery. The only way this would work is if the online bill pay account activation is just one way to enter but others such as customers without online bill pay as well as non-customers could also enter.

Speaking of shredding, shred this idea

Q 4. We  have a “shred day” at one of our branches and would like to offer a drawing for $50. This will be open to everyone, but the winner  must deposit the $50 into an account and it must remain in the account for 90 days. Since the opportunity to win  is open to everyone—it isn’t a lottery at that point. However, does requiring the winner to use the money to open a savings account constitute consideration—therefore making it a lottery?

Also if this is not a lottery and we may proceed, are there other disclosures,  such as “Must be over 18 years of age”? Would we need to have a set of contest rules for this as well? Would this be reportable on a 1099 INT form?

A. By requiring the winner(s) to deposit the funds in a bank account at your bank you are turning this into an impermissible lottery. You are essentially limiting the winners to only those who open an account so you would be having an illegal lottery ... prize, chance, consideration. (A prize for consideration—opening the account—is classified as a lottery.)

However, eliminating the requirement to deposit the winnings into an account at your bank and offering  a drawing open to all—such as giving away a gift card—is permitted.

If you decide to go ahead with the gift card idea, open it to all and require nothing more than an entry, the rules pertaining to advertising and disclosing this type of contest would fall under state law. It would not be reportable on a 1099-INT, IRS form used for reporting interest. That’s because it is not a prize for opening an account. It could be subject to 1099-MISC—the IRS form used for reporting miscellaneous income—reporting, but only if the prize has a value of $600 or more.

Can you team up with a customer on a drawing?

Q 5. We are spotlighting a local  business  each month and designating the business as "customer of the month."  This month it is a grocery store and it wants to hold a drawing whereby it gives out prizes from the milk industry since it is dairy month. The bank would have no part in the drawing except it would be held in the bank’s lobby. Is this permissible?

A. Yes, it should be permissible. As long as participation in the drawing is not limited to bank customers, and no one has to “pay” to enter, you are avoiding what federal laws define as a "lottery." If the drawing is not a lottery, then the business can use bank premises. 

If, however, only bank customers could participate in the drawing it would be a lottery and banks are prohibited from participating in lotteries. This prohibition includes the use of bank premises for a lottery, even if the bank itself is not conducting the lottery. You may just want to ensure that whatever the store is doing complies with any applicable state law.

Keeping it internal doesn’t insulate you

Q 6. We are a small FDIC-supervised community bank with two branches. Our sales team is interested in an internal employee-only promotion in which every employee who wants a basic $500 limit credit card would be automatically approved, with no credit history report pulled or underwriting. (Employees wanting a higher credit limit or a card with other travel rewards would have to apply and be approved through credit underwriting with their credit report being pulled, as we do with all other applicants.)

The sales team leaders would like to host a contest between the two branches.  All employees who apply for a credit card within a certain period of time would be entered to win bonus points or plane tickets or some other similar prize.

Do the federal lottery rules hold true for internal employee contests as they do for customer contests?

A. Yes, the same rules apply. This would be prohibited activity under the FDI Act. The lottery prohibition rule is not limited to lotteries involving persons outside the bank nor does the rule provide an exception for lotteries only involving bank employees.

The problem here is that the employee must establish an account (consideration) in order to be eligible to win. I am aware of banks that put employees in a drawing for a prize based on number of referrals or number of days worked without taking a sick day, but in those instances there is no consideration so thus, no lottery.

Does donating prize create exposure?

Q 7. My Compliance Team recently attended a UDAAP webinar where the speaker said that if a bank donates an item such as a basket or other item for a raffle or silent auction, and it is not done anonymously, that the bank  would be considered to be participating in a lottery in violation of Section 20 of the Federal Deposit Insurance Act. I looked at the Act and it does not specifically address this situation.  Is this law or just an interpretation?

A. I believe it is an interpretation. See, for example, OCC Interpretive Letter 900: “Participation In Lotteries By National Banks, which indicates that the donation of an item to be raffled off may be permissible (subject, of course, to certain additional facts and circumstances). It may be prudent to contact the speaker to determine if he/she has a specific cite substantiating the statement. 

Meanwhile, in social media land …

Q 8. We are looking at offering some Facebook contests in the near future. The basis of the contests will be to answer a trivia question posted on our page correctly. We are still up in the air as to award a prize to the first person to answer correctly or to have a drawing to choose a winner of those that correctly answered, e.g., within one day.

Because there is no purchase or money involved to enter the contest, and all someone has to do is "like" us and answer a question, can we do this?

A. Probably, but the laws governing the sponsorship and hosting of social media promotions are often misunderstood. It would be prudent to consult with legal counsel, as there may be state law issues to consider, as well as potentially “terms of use” issues when using Facebook.

Assuming the contest is also not limited solely to bank customers (which is considered “consideration,” just as if the person had paid $1 to enter), then it could be deemed not to be a “lottery.”

Another somewhat unrelated consideration might be how you go about awarding prizes when you don’t know the true identity of the entrant or where the person resides. Since Facebook has a global reach, you could have OFAC issues as well.

But that is a topic for another column!

Charitable purpose can make a difference …

Q 9. We are a national bank and have been asked to sponsor a prize to be given to the winner of a local 5K race being held to raise money for a child in our community who needs a bone marrow transplant. Can we do this and not violate the OCC's prohibition on lotteries?

A. Yes. The OCC opined on this issue in Interpretive Letter 923, issued in January 2002. In that letter the OCC stated that although a “lottery,” is defined as being an “arrangement” in which the winner is determined by the outcome of, among other things, a “game, race, or contest,” the lottery and the race are two separate things. 

In other words, the OCC opined that, “under federal case law, one of the essential elements of a lottery is that the winners are selected by chance. As between the participants in a race, the winner is determined by skill, not chance. Therefore, the race, itself, is not a lottery.” Accordingly, donating a prize for the winner of a race does not violate the lottery rules.  

But charitable purpose doesn’t always make it …

Q 10. We have several bank employees who are active in churches and other worthwhile organizations. Those employees want to sell raffle tickets at the bank to other bank employees and customers. These drawings are for very worthwhile purposes and we would like to be able to support our employee efforts in our community.  Can this be done?

A. No. Regardless of the charitable nature of the raffle, it is still illegal to hold, promote or sell tickets to a drawing on bank premises, even if the bank isn’t itself conducting the raffle. 

About the author

Leslie Callaway, CRCM, is ABA Compliance Project Manager in the association's Center for Regulatory Compliance. In conjunction with Mark Kruhm, CRCM, and ABA Senior Compliance Analyst, she writes ABA Banking Journal's Compliance Inbox.

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