I. INTRODUCTION
A financial institution and its advertising personnel or agency should be aware of several federal laws and regulations regarding the use of lotteries and other prize promotion activities before engaging in a marketing plan that may involve the opportunity to win a prize. As a general rule, federal laws prohibit national banks, federally insured banks and thrift institutions, Federal Reserve state member banks as well as state nonmember banks from: (1) dealing in lottery tickets or bets used as a means or substitute for participation in a lottery; and (2) announcing, advertising or publicizing the existence of any lottery and the existence or identity of any participant or winner in a lottery.
The term “lottery” is broadly defined by statute. The definition does allow however, financial institutions to accept deposits or cash or otherwise handle checks or other negotiable instruments or perform other lawful banking services for a state-operated lottery or for an officer or employee charged with administering a state-operated lottery.
The purpose of this article is reproduce and summarize pertinent federal statutes applicable to a financial institution’s participation in lotteries and prize promotions.
II. FDIC-INSURED STATE NONMEMBER BANKS
Section 20 (12 U.S.C. 1829a).
(a) A State nonmember insured bank may not –
(b) A State nonmember insured bank may not permit –
1. the use of any part of any of its banking offices by any person for any purpose forbidden to the bank under subsection (a), or
2. 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 subsection (a).
(c) As used in this section –
1. the term “deal in” includes making, taking, buying, selling, redeeming, or collecting.
2. the term “lottery” includes any arrangement, other than a savings promotion raffle, 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.
3. The term “lottery ticket” includes any right, privilege, or possibility (and any ticket, receipt, record, or other evidence of any such right, privilege, or possibility) of becoming a winner in a lottery.
4. The term savings promotion raffle" means a contest in which the sole consideration required for a chance of winning designated prizes is obtained by the depoist of a specified amount of money in a savings account or other savings program, where each ticket or entry has an equal chance of being drawn, such contest being subject to regulations that may from time to time be promulgated by the appropriate prudential regulator (as defined in section 5481 of this title).
(d) Nothing contained in this section prohibits a State nonmember insured bank from accepting deposits or cashing or otherwise handling checks or other negotiable instruments, or performing other lawful banking services for a State operating a lottery, or for an officer or employee of that State who is charged with the administration of the lottery.
(e) The Board of Directors shall prescribe such regulations as may be necessary to the strict enforcement of this section and the prevention of evasions thereof.
III. NATIONAL BANKS
Section 25. Prohibited Activities.
(a) A national bank may not –
(b) Use of banking premises prohibited. A national bank may not permit –
(c) Definitions. As used in this section –
(d) Lawful banking services connected with operation of lotteries. Nothing contained in this section prohibits a national bank from accepting deposits or cashing or otherwise handling checks or other negotiable instruments, or performing other lawful banking services for a State operating a lottery, or for an officer or employee of that State who is charged with the administration of the lottery.
(e) Regulations; enforcement. The Comptroller of the Currency shall issue such regulations as may be necessary to the strict enforcement of this section and the prevention of evasions thereof.
IV. FRB STATE MEMBER BANKS
Section 339.
(a) Prohibited activities
A State member bank may not –
(b) Use of banking premises prohibited
A State member bank may not permit –
(c) Definitions
As used in this section –
(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.
(d) Lawful banking services connected with operation of lottery
Nothing contained in this section prohibits a State member bank from accepting deposits or cashing or otherwise handling checks or other negotiable instruments, or performing other lawful banking services for a State operating a lottery, or for an officer or employee of that State who is charged with the administration of the lottery.
(e) Regulations; enforcement
The Board of Governors of the Federal Reserve System shall issue such regulations as may be necessary to the strict enforcement of this section and the prevention of evasions thereof.
V. FEDERAL CRIMINAL PROVISIONS: TITLE 18 – CRIMES AND CRIMINAL PROCEDURE
Section 1302. Mailing lottery tickets or related matter.
Whoever knowingly deposits in the mail, or sends or delivers by mail:
Any letter, package, postal card, or circular concerning any lottery, gift enterprise, or similar scheme offering prizes dependent in whole or in part upon lot or chance;
Any lottery ticket or part thereof, or paper, certificate, or instrument purporting to be or to represent a ticket, chance, share, or interest in or dependent upon the event of a lottery, gift enterprise, or similar scheme offering prizes dependent in whole or in part upon lot or chance;
Any check, draft, bill, money, postal note, or money order, for the purchase of any ticket or part thereof, or of any share or chance in any such lottery, gift enterprise, or scheme;
Any newspaper, circular, pamphlet, or publication of any kind containing any advertisement of any lottery, gift enterprise, or scheme of any kind offering prizes dependent in whole or in part upon lot or chance, or containing any list of the prizes drawn or awarded by means of any such lottery, gift enterprise, or scheme, whether said list contains any part or all of such prizes;
Any article described in section 1953 of this title –
Shall be fined under this title or imprisoned not more than two years, or both; and for any subsequent offense shall be imprisoned not more than five years.
Section 1304. Broadcasting lottery information.
Whoever broadcasts by means of any radio or television station for which a license is required by any law of the United States, or whoever, operating any such station, knowingly permits the broadcasting of, any advertisement of or information concerning any lottery, gift enterprise, or similar scheme, offering prizes dependent in whole or in part upon lot or chance, or any list of the prizes drawn or awarded by means of any such lottery, gift enterprise, or scheme, whether said list contains any part or all of such prizes, shall be fined under this title or imprisoned not more than one year, or both.
Each day’s broadcasting shall constitute a separate offense.
Section 1307. Exceptions relating to certain advertisements and other information and to State-conducted lotteries.
(a) The provisions of sections 1301, 1302, 1303, and 1304 shall not apply to –
(1) an advertisement, list of prizes, or other information concerning a lottery conducted by a State acting under the authority of State law which is – contained in a publication published in that State or in a State which conducts such a lottery; or broadcast by a radio or television station licensed to a location in that State or a State which conducts such a lottery; or
(2) an advertisement, list of prizes, or other information concerning a lottery, gift enterprise, or similar scheme, other than one described in paragraph (1), that is authorized or not otherwise prohibited by the State in which it is conducted and which is – conducted by a not-for-profit organization or a governmental organization; or conducted as a promotional activity by a commercial organization and is clearly occasional and ancillary to the primary business of that organization.
(b) The provisions of sections 1301, 1302, and 1303 shall not apply to the transportation or mailing –
(1) to addresses within a State of equipment, tickets, or material concerning a lottery which is conducted by that State acting under the authority of State law; or
(2) to an addressee within a foreign country of equipment, tickets, or material designed to be used within that foreign country in a lottery which is authorized by the law of that foreign country.
(c) For the purposes of this section (1) “State” means a State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States; and (2) “foreign country” means any empire, country, dominion, colony, or protectorate, or any subdivision thereof (other than the United States, its territories or possessions).
(d) For the purposes of subsection (b) of this section “lottery” means the pooling of proceeds derived from the sale of tickets or chances and allotting those proceeds or parts thereof by chance to one or more chance takers or ticket purchasers. “Lottery” does not include the placing or accepting of bets or wagers on sporting events or contests. For purposes of this section, the term a “not-for-profit organization” means any organization that would qualify as tax exempt under section 501 of the Internal Revenue Code of 1986.
VI. “FEDERAL TRADE COMMISSION ACT” AND “TELEMARKETING AND CONSUMER FRAUD AND ABUSE PREVENTION ACT”
Section 5 of the “Federal Trade Commission Act” prohibits unfair or deceptive practices and the Federal Trade Commission (FTC) has adopted regulations to determine if an advertisement of a contest is an unfair or deceptive practice. The FTC regulations have been applied to prize promotions.
The “Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994” has been implemented by regulations adopted by the FTC. The Act prohibits deceptive practices involving prize promotions and requires the disclosure of:
VII. EXAMPLES OF PROHIBITED LOTTERIES
A. The Proposal and Response
1. Proposal
A national bank decides to open up a sweepstakes. The sweepstakes will be open to those who have a checking account and a debit card issued to that checking account. The bank will assign numbers to signature transactions as they come in for payment to the bank. Because the proposed sweepstakes is limited to customers with checking accounts and debit cards, is this prohibited?
2. The Response
A national bank is prohibited to participate in a lottery/sweepstakes because of the law stated in 12 U.S.C. Section 25(a). (NOTE: Other banks are restricted as well, but prohibitions appear in different sections of law.) A lottery is defined as 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 – (1) a random selection; (2) a game, race or contest; or (3) 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.
Generally, to be a sweepstakes or lottery, it must be structured so that a person provides consideration in exchange for a chance to win a prize. Most legal experts hold the view that when a person gives a bank his business by becoming a customer, he gives “consideration.” If a bank limits eligibility to those individuals who are or who become customers, a bank is requiring consideration to be given for a chance to win a prize and a bank therefore, has a lottery or sweepstakes, which is illegal. By opening it up and clearly and conspicuously disclosing that no purchase, including no customer relationship, is necessary to win, and providing an alternate means for a non-customer to enter, the event is not a lottery.
B. Nebraska Law
Nebraska law should also be reviewed prior to a bank initiating a promotion. Some promotions may be permitted under Nebraska law as a “gift enterprise.” A gift enterprise is defined in Neb.Rev.Stat. § 9-701. Portions of the law are stated below:
Section 9-701 Conduct of gift enterprises; conditions; prohibited acts; violation; penalties; venue; enforcement.
(1) For purposes of this section: (a) Gift enterprise means a contest, game of chance, savings promotion raffle, or game promotion which is conducted within the state or thoughout the state and other states in connection with the sale of consumer or trade products or serices solely as business promotions and in which the elements of chance and prize are present.
(2) Any operator may conduct a gift enterprise within this state in accordance with this section.
(3) An operator shall not: ....(e) Require an entry fee, a payment or promise of payment of any valuable consideration, or any other consideration as a condition of entering a gift enterprise or winning a prize from the gift enterprise, except that a contest, game of chance, or buisness promotion may require, as a condition of particpation, evidence of the purchase of a product or service as long as the purchase price charged for such product or service is not greater than it would have been without the contest, game of chance, or business promotion.
(6)(a) Any person, firm, corporation, association, or agent or employee thereof who engages in any unlawful acts or practices pursuant to this section or violates any of the rules and regulations promulgated pursuant to this section shall be guilty of a Class II misdemeanor. (b) Any person, firm, corporation, association, or agent or employee thereof who violates any provision of this section or any of the rules and regulations promulgated pursuant to this section shall be liable to pay a civil penalty of not more than one thousand dollars imposed by the district court of Lancaster County for each such violation which shall accrue to the permanent school fund. Each day of continued violation shall constitute a separate offense or violation for purposes of this section.
If the activity to be promoted by the bank qualifies as a business promotion, not geared to making a profit from the gambling activity, but rather, through the increase of business, then the promotion would most likely qualify as a gift enterprise which is permitted under Nebraska Law.
C. Local Regulations/Ordinances
Even if a promotion proposed by a bank would be permitted under federal law and Nebraska law, it is possible that the local city or county jurisdiction prohibits certain gaming activities. It may be possible that local law enforcement personnel could seek to enforce the local jurisdictions own ordinances or regulations prohibiting the particular activity. Therefore, it is always prudent to consult with the local prosecuting authority to determine if the intended promotion is permitted under local ordinances or regulations.