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The former head of the industry association representing pokie trusts says the system is corrupt and needs total reform.
Former Community Gaming Association executive director Francis Wevers said the incentives to take advantage were too powerful.
The result was "endemic non-compliance" and "corruption" in a business which had a turnover of $9 billion.
About $850 million was distributed to the Government, the community and pokie trusts.
The pokie trusts face extinction under a private member's Bill brought by Maori Party MP Te Ururoa Flavell, which would strip them of their powers and create a new system for distributing funding.
His Gambling (Gambling Harm) Reduction Amendment creates a system whereby local government would distribute the cash with a focus on making grants to local organisations.
The Bill has led to pokie trusts organising a revolt among community and sporting organisations, using the spectre of disappearing funding.
Mr Wevers said he believed a new system would lead to greater levels of funding going back to the community, though he did not believe local government was the right conduit.
He said the flaws in the current system gave the hospitality sector too much power, allowing host pubs to command too much of a share of pokie proceeds under threat of shifting allegiance to other gaming trusts.
"Right from the start, the hospitality sector has seen the requirement for money to go back to the community as an imposition," Mr Wevers said.
Attempts to reform the industry failed as those involved "reverted to behaviour to maximise returns to venues" and trusts, he said.
"There were a whole lot of people and lawyers assisting them who were looking at ways to avoid the law." He said trusts sought professional advice to create funding structures that worked around the law, arguing they were not forbidden by the rules.
"What they were doing was corrupting the intent of Parliament." Mr Wevers said after leaving the CGA he had written a report highlighting the flaws in the industry which went to then-internal affairs minister Nathan Guy.
He said there was a willingness to fix the system.
In the report, he said more than half the pokie trusts were subject to sanctions by the Department of Internal Affairs after breaches of legal and operating obligations.
Mr Wevers said sanctions were light and infrequent. They were seen as an "irritant rather than a disincentive" and "calculated as an affordable cost of business".
He said it was critical the Government found a solution because of the need for funding.
"There are too many sports organisations that are so dependent on pokie money because they don't have any capacity to raise it any more from people who play the sports." Mr Wevers said eradicating poker machines was not the solution; those who wanted to gamble would find furtive methods to indulge.
He had made a submission to the select committee considering Mr Flavell's Bill, recommending a new system for distributing cash.
He believed it should be divided and tendered on a territorial basis with decisions based on those who offered the lowest level of expense and greatest return to the community.
There also needed to be greater harm-minimisation measures, including swipe cards for players that recorded their level of gambling.
A further measure he recommended - also in Mr Flavell's Bill - was removal of the ability to fund racing stakes with pokie money. Gambling money being used as a gambling stake was "bizarre".
Current CGA executive director Brian Corbett said he rejected Mr Wevers' views on pokie trusts but would not comment further.
Internal Affairs Minister Chris Tremain, the third minister to hold the role in a year, refused to be interviewed.
In a statement, he conceded "there may be wider concerns in the sector which need to be addressed".