Half of all inspections of pubs and clubs with pokie machines identify breaches or non-compliance with the law.
Fees paid by pokie operators are to be increased as levels of fraud and other breaches challenge the Government's ability to police the sector.
Internal Affairs Minister Peter Dunne is overseeing consultation on proposals that will increase fees paid by clubs and pubs with gambling machines by 54 per cent.
Those hikes risk "throwing the baby out with the bath water" and killing off community grants generated through pokies, the Community Gaming Association says.
"Sports and community groups will tell you that getting funds is more and more difficult," said association chair Brian Corbett.
The past three years have seen an increase in complex investigations into fraud and illegal activity at clubs and societies with pokies. That, and the declining number of pokie machines, has put severe financial pressure on the Department of Internal Affairs (DIA).
Gambling enforcement is funded through fees paid by gambling operators.
However, the costs of regulation outweighs revenue from fees by $9 million a year.
The proposed fee increases aim to bring in enough money to cover regulation costs, as well as repay this deficit over time - meaning no taxpayer money will be spent.
Pub and club gaming machines dropped from 20,120 in 2007 to 16,717 at the end of last year.
New Zealanders' gambling spend has not fallen significantly, but the DIA's revenue from operators has, as it is tied to the number of machines.
A DIA spokesman said the breaches identified by investigators ranged from not keeping correct records to fraud.
The largest investigation in the history of the gambling sector, "Operation Chestnut", is near completion.
Conducted by the DIA, Serious Fraud Office and the Organised Financial Crime Agency NZ, it scrutinised $30 million in gaming grants made by trusts including Bluegrass.
Bluegrass' licence was cancelled after the DIA ruled its start-up funding was sourced from three racing clubs, rather than from South Canterbury Finance, as claimed.
About 80 per cent of community grants from Bluegrass went to racing, including the three racing clubs.