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Some studies say that just by getting a lottery ticket, participants’ mood instantly improves.
Participation in the lotteries can have positive effects on mental health, including self-esteem, better social interactions, and stress reduction. This might be the reason for the increasing interest in organizing raffles and lotteries in recent years.1
However, the lottery runners need to be aware of the legal requirements and potential implications for non-compliance with the lottery and gambling laws. All of those might actually have opposite effects.
Thin line between non-regulated and regulated activities
In 2017 UK Gambling Commission published an article about a noticeable increase of house-raffles, where homeowners would offer their homes as prizes for draws to attract more buyers and make a profit. The Gambling Commission warned the homeowners that the difference between draw or prize-competition (non-regulated) and lottery (regulated) is very thin, and they might be at risk of breaking the law by organizing illegal lotteries without obtaining proper gambling license.2
In 2019 the National Crime Agency in cooperation with the Gambling Commission introduced a new SAR glossary code XXILTXX for illegal lotteries.3 This way any Suspicious Activity Report filed under that certain glossary code is shared with Gambling Commission, and activity can be investigated by the proper units.
Significant rise of social-media-run illegal lotteries has been also observed in the recent years, and has been identified as a threat for the consumers. It is not an obligation of participants to verify whether the raffle they participate in is licensed or not, however by entering, they expose themselves to a scam risk - customers of unlicensed lotteries are not protected by the consumer gambling protection rules in the UK.4
It is an offense (Under the Gambling Act 2005) to facilitate or promote a lottery unless the operator holds an operating license, while profits from illegal lotteries may be considered criminal property under the Proceeds of Crime Act 2002 (POCA).
While on the face value, it seems pretty obvious what can and cannot be considered a lawful lottery, there are a number of rules and regulations which lottery runners must follow.
Raffles (or lotteries) are regulated and defined in UK Gambling Act of 2005 as: “arrangements where participants are required to pay in order to participate in the arrangement, in the course of the arrangement one or more prizes are allocated to one or more members of a class, and the prizes are allocated by a process which relies wholly on chance.”5
With multiple nuances and regulations, it is not a surprise that many of the individuals who ran illegal raffles were not even aware of breaking the law.
Differences between lotteries, free draws and prize competitions
Lotteries are intended to fundraise for a good cause, therefore they can’t be organized for commercial profit (unless they qualify for very limited exemptions).
On the contrary, free draws and prize competitions can be run for commercial or private gain and can be used when promoting a product or raffling a high value item, like houses. These types of events are not regulated nor supervised by the Gambling Commission.
Basic difference between a free-draw and lottery is that in the lottery participants must pay to enter. The differentiator for prize competitions is more complex - the chances to win in competition should mostly depend on the knowledge or skills of the participants rather than pure luck, as it is determined by the lottery or free-draw characteristics.6
How to recognize illegal lottery
The problem begins when we try to define what a ‘free entry’ means for free-draws. Gambling Commission answers that question, indicating that ‘normal rates’ for methods of communication still qualify as ‘free entry'.
If the internet/phone provider charges abnormally high rates for connection, then Gambling Commission concludes this might constitute a lottery instead. When the draw operator allows different methods of entering - paid and unpaid entry for participants, it could still be considered as free-draw.
Operators of prize-competitions also face the possibility of running an illegal lottery if their competition does not fulfill one of the two rules. Following requirements are set to determine when the competition truly is based on the experience, knowledge or skills of the participants, not on chance.
If one of the below conditions are met, then the competition does not require a license:
- prevent a significant proportion of people who wish to participate from doing so (section 14(5)(b) of the 2005 Act)
- prevent a significant proportion of people who participate from receiving a prize (section 14(5)(a))
Let’s discuss some examples!
If a home-owner is considering raffling their house, and decides to sell a given number of tickets to receive a desired value for the house, they should obtain a license from Gambling Commission to organize a lottery.
Lotteries cannot be organized for profit, therefore all collected money minus expenses and prize costs have to be donated for a good cause.
To circumvent these rules, some of the home-owners try to add ‘knowledge and skill’ element, running the house-raffle as prize-competition type of an arrangement, however as we discussed in the previous paragraph, adding simple question does not fulfill requirements (a) or (b) of preventing a significant proportion of people from entering the raffle, therefore might attract attention of Gambling Commission.
Similarly, individuals or entities often try to promote their business activities through social media and attract customers by offering a raffle. They usually are not aware of the licensing requirements, and advertise their raffles online (which in simple words implies they need a license), therefore profits from the lottery are considered a criminal property.
The Advertising Standards Authority (ASA), the UK’s independent advertising regulator, in 2022 issued an advice in regards to promotion of raffles, suggesting that:
“Promoters should take legal advice before embarking on promotions with prizes, including competitions, prize draws, instant-win offers and premium promotions, to ensure that the mechanisms involved do not make them unlawful lotteries” 9
To distinguish organizers from participants of the illegal lotteries, obligated institutions would look for patterns of multiple credits from seemingly unrelated individuals (which indicates the account owner is organizer), or multiple debits with similar key words (which could indicate the account owner only participates in raffles, and is not breaking the law).
Gambling Commission notices that most of the illegal raffles are promoted through social media. They advise looking for common keywords like “raffle”, “prize”, “bonus ball”, “lottery”, and identification of platforms being used.
Other countries, other … regulations
In most of the European countries free-draws and prize-competitions are allowed with or without a license under various circumstances, while lotteries are generally permitted only on license basis and reserved for charity organizations or gambling operators.
- In Sweden, similarly to the United Kingdom, lotteries are designed mainly for non-profit charitable organizations, and are regulated by the Lotteries Act (Sw. Lotterilagen). The price-contests are allowed, as long as they do not qualify as lotteries.
- In Switzerland, lotteries are mostly illegal (with some exceptions).
- Spanish law also allows free-draws and prize-competitions without a license, on similar terms as the United Kingdom.10
From an AML perspective, financial institutions have obligations to report suspicious transactions that might pertain to illegal lotteries run by their customers, as the proceeds are considered criminal property. Therefore it is imperative for all lines of defense to understand the gambling and lotteries regulations in their respective jurisdiction, and regularly train members of the staff how to spot unusual behavior and report suspicious activity to the respective Financial Intelligence Units.
Sources:
1. https://pubmed.ncbi.nlm.nih.gov/36189682/
2. https://www.gamblingcommission.gov.uk/news/article/dont-take-a-gamble-raffling-your-home
3. https://www.nationalcrimeagency.gov.uk/who-we-are/publications/497-sars-in-action-february-2021/file
4. https://www.gamblingcommission.gov.uk/blog/post/facebook-lotteries-a-bit-of-fun-or-a-potential-risk
5. https://www.legislation.gov.uk/ukpga/2005/19/section/14
6.https://assets.ctfassets.net/j16ev64qyf6l/3pj85vOPWgkchLNLVUs9PV/92c9622bea378560e4ecb375e3f94364/Prize-competitions-and-free-draws-the-requirements-of-the-gambling-act-2005.pdf
7. https://www.gamblingcommission.gov.uk/public-and-players/guide/page/types-of-lottery-you-can-run-without-a-licence
8. https://www.gamblingcommission.gov.uk/public-and-players/guide/page/fundraising-and-lotteries-on-social-media
9. https://www.asa.org.uk/advice-online/promotional-marketing-lotteries.html
10. https://www.sorainen.com/wp-content/uploads/2019/11/Guide-Promotional-Games-and-Contests-in-the-EU.pdf
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