A law change in 2020 let pokie trusts hold onto more cash to stop them tipping into insolvency when Covid-19 cut off their revenues, but officials are now concerned the money has instead been spent on property, equipment and to pay off debt
Millions meant for community grants appears to have been spent on new pokie equipment and paying down the debts of class 4 gaming trusts.
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Independent analysis by Newsroom checked by external experts shows a number of gaming trusts spent money supposed to be held as working capital reserve, rather than holding it as cash or distributing it as grants.
The ability for trusts to hold reserves only came into law during the first Covid-19 lockdown. Prior to July 2020 the class 4 sector was required to pay out all net proceeds as grants, but when lockdowns arrived and revenue streams were cut, many were tipped into technical insolvency.
The sector lobbied hard and the law was changed to allow them to hold onto cash reserves no more than 1.5 times their liabilities.
"To my knowledge there’s nothing going on there and it’s none of your business... you’re clearly looking to do a job on the pokie trusts and I’m not going to be a part of it.” – Barry Steans, Air Rescue Trust
Most of the trusts at that time had low – if not negative working capital balances – and retained millions to bring them up to the new allowance.
However, legal opinion seen by Newsroom concludes a number of societies likely misused the funds.
“Very significant amounts of net proceeds required to be distributed for authorised purposes in the 2020, 2021 and it seems 2022 financial years, have been applied by a number of Class 4 licence holders in breach of the Act and the 2004 and 2020 Regulations, to Capex and debt reduction."
The sector has strict expenditure rules and can only borrow or use depreciation to fund investment or financing activities.
Across 2020 and 2021 Air Rescue Services Trust had undistributed proceeds worth $4.9m on their books, but only required $2.8m worth of proceeds to bring them into line with the changes.
At the same time the difference between was spent and what was permitted to be spent was roughly the same amount as the unaccounted for net proceeds.
“Equity and an increase in the licence holder’s fixed assets, arise on account of that same difference,” the legal opinion said.
A second, separate accounting opinion agreed.
“I have reviewed the analysis of Air Rescue and I agree with the conclusion that this company is using retained ‘net proceeds’ for maintaining their working capital as allowed and expanding their non-current assets (capital expenditure). For the years 2020 and 2021, the retained ‘net proceeds’ for the two years, were mainly used by increasing the working capital (increase current asset and reduce current liabilities) in 2020, much higher than allowed.”
“In 2021 the retained ‘net proceeds’ was used for increasing the non-current assets (capital expenditure).”
Managing director Barry Steans told Newsroom he was not aware any investigations were underway.
"To my knowledge there’s nothing going on there and it’s none of your business... you’re clearly looking to do a job on the pokie trusts and I’m not going to be a part of it.”
The accounting opinion also suggested some of the working capital set aside by NZCT in 2020 was spent in 2021.
NZ Community Trust is the country’s largest grant-paying organisation.
Chief executive Mike Knell said he was aware DIA was looking into the issue of working capital reserves but NZCT had complied with the regualtions.
“Most societies have been asked to show their working, but I’m not aware of any non-compliance.”
“I’m comfortable with the way our operations have been handled. The working capital was an opportunity through Covid to get liquidity into the sector... it’s appropriate and fluid.”
It’s a similar story for Grassroots where undistributed net proceeds across 2020 and 2021 total $5.1m but only $3.9m was required to set up the reserve.
The amount available to spend on equipment and debt was $7.7m, yet $8.6m was spent.
In 2022 the organisation reduced its reserve further.
“If it is the case that the reduction in the [working capital] in the 2022 financial year sourced the Capex expenditure over and above the level of current year depreciation and debt, then presumptively the net proceeds represented by the released [funds] have been used to fund additional Capex over and above the level of current depreciation,” the legal advice noted.
“As I comment earlier in this section of my advice, net proceeds released from the [working capital reserve] can only be applied for distribution to authorised purposes (or recommitted to the working capital reserve, which is not an issue here).
“Any other use is in breach of the Gambling Act 2003, and the 2004 Regulations and the 2020 Regulations.”
Grassroots executive chairman Martin Bradley said he was not aware of any investigations and that Grassroots had not been asked to provide any information to DIA.
Reducing the reserve amount in and of itself is not problematic – the 1.5 threshold is an upper limit and not a required amount, however, the cash must return to the ‘net proceeds’ pile and be distributed as grants, not used to purchase items or pay off debt.
Pub Charity managing director Martin Cheer said to the best of his knowledge Pub Charity had complied with its obligations.
"The relief package put in place by the Minister was absolutely necessary to address issues of solvency highlighted by the Covid pandemic. It was agreed by industry and DIA representatives on the basis that it was a) temporary and b) designed to limit disruption to community funding to the absolute minimum."
An Internal Affairs spokesperson confirmed an investigation was underway and it had enlisted external help.
“WCR is continually monitored as part of the relicensing process. For the calendar year end of 2022 there are some societies that are being investigated further due to apparent non-compliance with the requirements. However due to the nature of the investigations, we are not a position to comment further at this time.
“Due to the special accounting requirements of the Gambling Act, KPMG is supporting the department with some of this monitoring and related investigations... No compliance actions have been taken at this time.”
