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Banking and Lotteries

The Federal Reserve Act, the National Bank Act and the Federal Deposit Insurance Act all have provisions prohibiting a bank from participating in a lottery. Also, there are state laws governing lotteries. In general, a lottery is any arrangement whereby three or more persons advance money or credit (generally defined as anything of value) to another in exchange for the possibility that one or more, but not all, of the participants will receive more than the participant advanced to participate and the result is determined by either a random selection, the result of a game, race or contest, or the outcome of various events. When the law says that a bank may not participate in a lottery, it means just that; a bank may not conduct a lottery, allow its premises to be used in the conduct of a lottery, and it may not announce, advertise or publicize the existence of a lottery or a winner of a lottery.

The critical element for a contest to be a lottery is that the participants must be required to give up something of value to participate. If a person can participate for free, then, the contest is a drawing and not a lottery. For example, a bank’s marketing department devises a promotion to obtain new deposit accounts whereby everyone who opens an account during the month of July with a minimum deposit of $100 has their name entered in a drawing for a new gas grill. That with nothing more is a lottery. To get his or her name in the drawing, the depositor must give up something of value, the use of the deposit. On the other hand, if the marketing department provides a reasonable alternate method of entering the drawing that does not require the participant to give up something of value, it becomes a drawing and not a lottery. For example, all persons who open a new account are automatically entered but anyone else who wants to enter may do so by registering with the bank or going to the bank’s website. Now because persons may enter without giving up something of value the character of the contest changes from an illegal lottery to a legal drawing. Any promotion that the bank does of the contest must include instructions on how a person may enter without giving up anything of value.

Occasionally, a worthy charity or service organization, the Good Sisters of the Poor or the Elks Club, holds a lottery to raise money for its functions and asks its local bank if it can advertise the lottery in its lobby or set up a table to sell tickets. The answer is that if you accommodate the organization you have violated the law. You are allowing your premises to be used to promote a lottery. That said, in the hierarchy of regulatory violations, this is about at the bottom of the stack. I wouldn’t allow an organization to use my lobby while the examiners were in the bank, but if I did allow it at a different time and I was discovered I would plead ignorance, and the worst that would happen is that I would be told not to do it again.

Now, how about the March Madness or Super Bowl contest that the bank’s employees hold every year? Those are certainly lotteries, and the bank’s premises are certainly being used. (The bank’s website and email server are part of the bank’s premises.)

Even though it technically is a violation, I have never heard of a bank being criticized for contests that its employees held, but I wouldn’t solicit an examiner to see if he or she wanted to enter.
One thing that I would be cautious about is a bank employee selling tickets to a lottery being conducted by an organization of which the employee is a member to bank customers on bank premises. First, it is a violation and second the customer may feel some pressure to buy the ticket. The activity could harm the reputation of the bank.

Bankers need to be aware of the lottery rules in designing promotions to attract new customers or to increase the use of the bank by existing customers. If you want to give a gas grill to every customer who opens a new account, that is fine from a lottery standpoint, because there is no element of chance. If the customer opens the account with the required deposit he or she gets the grill. There may be some Regulation DD disclosure hoops you will have to jump through, but there is no lottery issue. But, if there is a contest where some will win and some will not, then, you need to ascertain that it is not a lottery.
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The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

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