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#1617509 - 10/19/11 04:03 PM Phase II Exempt Customer - Lottery Account
Sugar Coater Offline
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One of our Phase II exempt customers, which is a convenience store, recently began selling lottery tickets and opened a separate account specifically for that. The customer is exempt, so all accounts they have are also exempt - even the lottery account - as long as they do not exceed the 50% in gross revenue limitation for Phase II exemptions? Am I interpreting this correctly?

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#1617522 - 10/19/11 04:22 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
John Burnett Offline
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You should review 31 CFR 1020.315(f): "A transaction carried out by an exempt person as an agent for another person who is the beneficial owner of the funds that are the subject of a transaction in currency is not subject to the exemption from reporting contained in paragraph (a) of this section."

I believe that the state lottery commission or the equivalent in your state is the beneficial owner of the funds in the lottery account, so the exemption for your customer would not extend to that transaction. However, the lottery commission would be exempt as an agency of state government, so a cash transaction in excess of $10,000 would still not have to be reported under this scenario.
Last edited by John Burnett; 10/19/11 05:51 PM.
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#1698875 - 05/11/12 07:10 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
Paula Balentine Offline
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Is the Store Owner required to deposit the lottery funds directly into an account seperate from his regular deposit account?
We have a customer that deposits all the money into one account, then makes a transfer into the account set up for the lottery sales.
Thanks in advance for your help/comments.
Last edited by Paula Balentine; 05/11/12 07:11 PM.
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#1698891 - 05/11/12 07:24 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
rlcarey Online
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It would be a matter of the State lottery requirement in which you are located.
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#1698899 - 05/11/12 07:35 PM Re: Phase II Exempt Customer - Lottery Account rlcarey
Paula Balentine Offline
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Ok, thanks.

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#1698903 - 05/11/12 07:43 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
John Burnett Offline
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Most state lottery commissions want to ensure that the funds from lottery sales are properly identified as being held in an agent capacity on behalf of the commission. That keeps them out of the reach of a seller's creditors. The only way to do that is to have a separate account. Requiring that all lottery sales be deposited directly into the account may be something your state does.
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#1698953 - 05/11/12 08:58 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
devsfan Offline
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Is it the bank's responsibility to know each state lottery commission's requirements (we operate in 5 states) and enforce it?

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#1698958 - 05/11/12 09:00 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
rlcarey Online
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No, not unless State law puts some responsibility on the banks.
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#1698959 - 05/11/12 09:01 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
Dani York, CRCM Offline
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I don't think it is necessarily the bank's responsibility to enforce the rules of the lottery commission, but from a BSA perspective, you should want to know what is allowable or not inorder to effectively monitor the account, determine legitimate activity from suspicious activity, etc.
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#1698960 - 05/11/12 09:02 PM Re: Phase II Exempt Customer - Lottery Account devsfan
Elwood P. Dowd Offline
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You need to know the rules in your state in setting up exemptions and in self defense.

I'm aware of a situation where a customer sold lottery tickets in two states and each state required a dedicated account for the sale proceeds. The problem was, the customer commingled the funds into a single "dedicated" account. One state got shorted and (drum roll, please) sued the customer, the bank, and the other state.
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#2118084 - 02/13/17 10:21 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
Red Raiders Offline
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We have a gas station as a customer who has a deposit account here but not a lottery account. We have them exempted but how would we document that they have less than 50% of their revenues from lottery?
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#2118087 - 02/13/17 11:10 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
rlcarey Online
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#2118093 - 02/14/17 12:10 PM Re: Phase II Exempt Customer - Lottery Account Red Raiders
Elwood P. Dowd Offline
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Mr. Carey has provided the correct resource, but it's the most worthless thing FinCEN has ever published.

Due to a lack of effective guidance, what is acceptable as documentation varies from one examiner to another. Most will accept a statement signed by the customer supporting the last annual review saying what percentage of their revenues comes from lottery ticket sales. Obviously, that proves nothing. However, it's when banks are asked for proof that they eventually conclude the exemption isn't worth the time and trouble it takes.
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#2118106 - 02/14/17 02:14 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
PrimeTime Offline
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To follow up on Ken's thought above, we recently ran into this exact scenario. Historically we had our Exempt lottery customers sign an attestation noting their percentage of lottery sales in relation to revenues, which was a non-issue on many exams. This round, the examiners decided to focus on it and provided a recommendation that we obtain financial statements going forward noting as Ken did that the attestation proved nothing. I lucked out with some as they were also lending customers and we already had the statements on file, but for others we had to remove the exemption as they were not able to furnish the statements in a timely manner.

In essence, just because something's not an issue now doesn't mean it will never be; and somewhere down the road you will run into an Examiner in the same school of thought as this. It would be less work to set the expectation of financials in order to "exempt" yourself of future criticisms.
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#2118114 - 02/14/17 02:42 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
rlcarey Online
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Just be aware that a standard retailer would have to be selling an extraordinary amount of lottery tickets to cross the 50% revenue test. It is based on income earned from the sales and not gross sales of tickets.

https://www.fincen.gov/resources/statute...e-determine-ctr
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#2118164 - 02/14/17 05:11 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
thomasj Offline
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For lottery retailers in our state, the lottery requires a separate account just for lottery proceeds. In any event, the state takes their cut of lottery sales (which, last time I checked, was about 97% with 3% going to the retailer). It was pretty easy to pull a few months data and put together enough evidence that the business was getting less than 50% of their revenue from lottery sales. One of the things you need to be cautious of is if the retailer gets a cut of a large jackpot payout that could put them over the 50% threshold for the year. Not sure if a solid argument could be made one way or another on that issue.
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#2118186 - 02/14/17 06:06 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
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Part of the problem here is the retailer doesn't have their lottery account here. Just one of their operating accounts. I agree that it is a no-brainer that they don't have 50% of their revenues in lottery sales but our examiner is asking how we proved that.
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#2118197 - 02/14/17 06:33 PM Re: Phase II Exempt Customer - Lottery Account Sugar Coater
thomasj Offline
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Another case of it being really difficult to gather any comfort that you know what is exactly going on with a higher risk customer because you are only seeing part of the picture. You could ask to review statements from the lottery account; however, depending what other activity there is that might only solve a portion of the problem.
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