Department of Internal Affairs: Effectiveness of controls on non-casino gaming machines.


Non-casino gaming machines are devices that are totally or partly mechanically or electronically operated for use in gambling in venues other than casinos. They are commonly known as “pokie” machines.

The Department of Internal Affairs (the Department) estimates that about $8,500 million (including GST) was spent in 2004/05 in non-casino gaming machines.

The Department estimates that about $7,500 million (including GST) of this total was returned to gamblers as winnings, and about $384 million (excluding GST) was given to the community. The remainder goes to taxes and charges, and to the operating costs of operators of the machines and venues where the machines are located.

The Gambling Act 2003 (the Act) sets out the legislative framework for controls on non-casino gaming machines. The Department is responsible for administering the Act.

What we audited

We focused on the effectiveness of the Department’s policies, procedures and practices for ensuring that:

  • non-casino gaming machine operators and venues are licensed – this is to ensure that only those persons and organisations who meet the requirements of the Act are able to enter and remain in the non-casino gaming machine industry (the industry);
  • non-casino gaming machine operator and venue costs are appropriate – this is because inappropriate costs reduce the funds subsequently available to the community;and
  • funds are distributed or applied to authorised purposes, including through grants – if funds are used for other purposes, they are not benefiting the community in the manner intended by the Act.

We did not examine the flow of funds to the community, the effect or use of the funds in the community, or the Department’s oversight of harm-minimisation activities.

Our findings

Although the Department’s strategic approach to compliance is still emerging, the fundamental elements we expected the Department to have were in place. The Department has extensive policies and procedures covering its licensing and audit activities, and a risk-based approach to compliance. However, the Department could improve, particularly in consistency of practice and consistency of policies and procedures with the Act.

Licensing non-casino gaming machine operators and venues

As at 30 June 2006, there were 496 licensed operators. Of these, 73 were societies (who generally distribute funds to the wider community) and 423 were clubs (who generally apply funds to the club’s own authorised purposes).

The Department has a comprehensive licensing manual that outlines policies and procedures. It also has a systematic process for amending licensing policies and procedures. However, some aspects of its policies, procedures, and practice did not comply with the Act. Its shortened procedure for renewing licences did not allow the Department to be satisfied that all the necessary requirements of the Act had been met before a licence was issued. Another breach of legislation we found was that licensing staff were issuing and renewing licences without the necessary delegated authority. The Department treated the delegations issue as serious, sought appropriate legal advice, and is acting on that advice.

There are also some minor administrative inconsistencies between the Department’s practice and its policies and procedures.

In our view, the procedure used by the Department to require applicants to maximise net proceeds by stating at the time of licence application how they will maximise the funds available for the community is weak.

There have been significant delays in finalising annual licences for some societies and clubs.

Monitoring and enforcing compliance

The main tools used by the Department to enforce operating and venue costs rules are audits, investigations, and education. Whether an audit is conducted is determined by the Department’s risk profiling of operators. Operators assessed as high risk are audited.

The focus on audit of high-risk operators, with no random audit of other operators, is the same situation we found in our 1998 audit. After the 1998 audit, Cabinet required the Department to audit 50% of operators every year. This requirement was rescinded in 2003.

Where the Department does not have current information for a given risk factor, it makes assumptions about the level of risk. We noted some inconsistencies in these assumptions. In our view, the Department has made a judgement on the 9 Summary relative risks of societies and clubs without definitive information on differences in their actual levels of compliance.

We observed that the definition of high risk had changed from year to year. The number of audits included in the audit work programme has reduced over time.

The actual number of audits undertaken by the Department is not clear from the Department’s activity reporting due to the types of measures used.

In our view, there is a risk that, by doing fewer audits, the Department gathers less information about entities. This means fewer meet the threshold of high risk to warrant an audit, which leads to a further reduction in audit activities. The Department has identified this as an issue.

Policies and procedures exist for auditing venues and operators. An audit checklist and manual are the main resources used by staff.

The audit manual does not contain guidance on how to assess whether operator expenses are reasonable. The Department has identified this as an issue. We believe the Department needs to do more to provide such guidance. Until it does, this will remain an area where significant benefits to the community could be lost.

We found some inconsistencies in the manner in which Department staff implemented policies and procedures when conducting audits. We also found the Department’s audit checklist and manual were not consistent with the requirements of the Act.

Compliance of grant processes and payments

Operators use grants to distribute funds to authorised purposes. The processes operators use for making grants vary in sophistication. The type of grants operators make also varies widely, reflecting operators’ different authorised purposes. Some operators make grants for only a single purpose (for example local rugby), while others will consider applications from community groups throughout New Zealand for a wide range of activities.

The Department uses audits and investigations to monitor grant processes and grant payments.

Examples of issues found by the Department in audits were:

  • grants that did not fit an operator’s statement of authorised purpose;
  • recipients using funds for other than stated purposes;
  • differences between actual and published grant information; and
  • total grants being less than the minimum level of 37.12% of GST-exclusive gross proceeds.

The Department conducts surveys on the allocation of grants across the industry every few years.


Until the Department has more information on the level of compliance within the industry, it is not possible for us or the Department to make a reliable assessment of the extent to which the Department’s approach contributes to the industry’s compliance with the Act. In our view, the Department should accelerate work on outcome measurement. This is because of the importance of the work in demonstrating to stakeholders the results being achieved by the Department. It is also because of the importance of outcome information in contributing to the Department’s understanding of the effect of its work as well as determining the focus of its work.

Our recommendations

We recommend that the Department of Internal Affairs:


  1. ensure that complete licensing and audit information is available in its information system (Licence Track), and that staff check this information during licensing and relicensing of non-casino gaming machine operators and venues;
  2. review and change its policy and practice for considering non-casino gaming machine licence applications, so the checks are enough for the Secretary for Internal Affairs to discharge their obligations under the Gambling Act 2003 when issuing a new operator’s or venue licence or renewing an operator’s or venue licence;
  3. review and amend the key person checks it undertakes when considering noncasino gaming machine licence applications, so the checks are enough for the Secretary for Internal Affairs to discharge their obligations under the Gambling Act 2003 when issuing a new licence or renewing a licence;
  4. periodically (for example, annually) review self-disclosure rates against the requirements of sections 54 and 71 of the Gambling Act 2003, and use this information to improve future self-disclosure rates;
  5. strengthen its processes for ensuring that the Secretary for Internal Affairs is satisfied that non-casino gaming machine licence applicants will maximise net proceeds;
  6. introduce a quality review of non-casino gaming machine operator’s and venue licences before the licences are finalised and issued;
  7. give priority to resolving non-casino gaming machine operator’s licence applications that have been outstanding for more than one calendar year;

Operator and venue costs

  1. accelerate work on outcome measures relating to compliance within the noncasino gaming machine industry;
  2. improve its controls over gambling inspector or manager adjustment of a noncasino gaming machine operator’s overall risk profile rating;
  3. reduce the level of missing information about non-casino gaming machine operators within its risk-profiling system, and improve the consistency of assumptions about operator risk in the absence of current information about operators;
  4. improve information in its planning and accountability documents by stating the quantity of work the Department will undertake for its chosen audit risk threshold for operators, and indicate the expected contribution of this work to compliance in the non-casino gaming machine industry;
  5. continue to closely scrutinise and improve, where necessary, its recording and reporting of the volume of activities that it has undertaken related to noncasino gaming machine operators (such as audits, investigations, and sanctions applied), and corrects any activity information already in the public arena that it determines is incorrect;
  6. differentiate between different sizes of audits of non-casino gaming machine operators, include the full time taken for audits in its performance recording, and reflect these in its accountability documents;
  7. develop guidance on reasonable non-casino gaming machine expenses by making better use of the information it already collects and, where necessary, by gathering more information;
  8. review its non-casino gaming machine Audit Checklist and Audit Reference Materials manual against the specific requirements of the Gambling Act 2003, review the information gambling inspectors need to meaningfully assess compliance with these requirements, and amend the checklist and manual accordingly;
  9. enhance its management of compliance staff independence risks so gamblers, the Department of Internal Affairs, its staff, and the non-casino gaming machine industry are better protected from these risks; and


  1. provide its staff with clear guidance on the extent of its responsibilities for grants and non-casino gaming.
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