1. Lottery-linked Savings Client Problem

2. Client Problem
A partner comes to you and says that a depository institution client wants to offer lottery based savings accounts in the United States. Unfortunately, the partner is from litigation and forgot to find out what kind of depository institution the client is. All he knows is that the client is all hot under the collar because credit unions are already doing it. He tells you to research all options and to get him a response as soon as possible. He also says the system works by a consumer depositing money each week (say $25) with no interest payment but the chance to participate in a lottery.

3. Participation by National Banks in Lotteries and Related Activities
12 U.S.C. § 25a (2008) (a) Prohibited activities: A national bank may not — (1) deal in lottery tickets; (2) deal in bets used as a means or substitute for participation in a lottery; (3) announce, advertise, or publicize the existence of any lottery; (4) announce, advertise, or publicize the existence or identity of any participant or winner, as such, in a lottery.

4. Definition of Lottery
(2) The term “lottery” includes 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.
Elements:
Offering of Prize;
Awarded by Chance; &
Giving of consideration. 4

5. Permitted Activities for FDIC-Insured State Banks
12 U.S.C. § 1831a (2009) (a) Permissible activities: (1) In general: After the end of the 1-year period beginning on December 19, 1991, an insured State bank may not engage as principal in any type of activity that is not permissible for a national bank unless— (A) the Corporation has determined that the activity would pose no significant risk to the Deposit Insurance Fund; and (B) the State bank is, and continues to be, in compliance with applicable capital standards prescribed by the appropriate Federal banking agency.

6. Legal Considerations in Charter Choice for Lottery-linked Savings
National Bank
State Bank
Credit Unions
Affirmative Authority to Engage
Perhaps, 12 U.S.C.
24 (Seventh)
Depends on State Law
Depends on Chartering Authority
Federal Limitations on Lotteries
12 U.S.C. 25a Restriction on Lotteries
Similar Restrictions on Lotteries under 12 U.S.C. 1829a (perhaps FDIC support)
None
State Law Restrictions on Lotteries
Likely Preempted
Unclear
Preemption of State Law Not as Strong
Other Restrictions
12 U.S.C. 1831a

7. Source:

8. Definition of Lottery after the American Savings Promotion Act
12 U.S.C. § 25a (2014) (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.

9. Definition of Savings Promotion Raffle
12 U.S.C. § 25a (2014) (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 deposit 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 12 U.S.C. § 5481).

10. Updated Legal Considerations
National Bank
State Bank
Credit Unions
Affirmative Authority to Engage
Perhaps, 12 U.S.C.
24 (Seventh)
Depends on State Law; Perhaps
Depends on Chartering Authority
Limitations on Lotteries
12 U.S.C. 25a Restriction on Lotteries, Exceptions for savings promotion raffles
Exceptions for savings promotion raffles
None
State Law Restrictions on Lotteries
Likely Preempted
Unclear
Preemption of State Law Not as Strong
Other Restrictions
12 U.S.C. 1831a 10