The Australian-born hooker was also banned from taking any further part in the tournament, the federation said here after a hearing.
The federation reached its decision after a day of international phone hook-ups following New Zealand's presentation of its submission to the tournament's governing body Wednesday.
The RLIF committee said it became apparent following the talks that New Zealand knew on October 19 that Fien's great grandmother’s, not his grandmother's, name was on the New Zealand birth certificate he had provided to officials.
In a brief statement, the New Zealand Rugby League (NZRL) said it would not appeal the ruling.
"The NZRL accepts it made an error," the statement released by NZRL general manager Peter Cordtz said.
"The NZRL confirms that it will not challenge the decision.
"Nathan Fien acted honestly at all times in his disclosures to the NZRL.
"Accordingly, Nathan Fien had no charge to answer; nor did any other person.
"The NZRL regrets any hurt suffered by Nathan and his family."
Kiwis coach Brian McClennan would not discuss the decision.
The federation said tournament rules dictated that a player's parents or grandparents had to be born in the adopted country for him to be able to switch allegiances.
The penalty has jeopardised New Zealand's hopes of qualifying for the November 25 final, as they are now back on zero competition points with the Lions.
New Zealand have one more match to play against Great Britain, in Wellington on November 11.
The Kiwis were docked the two Tri-Nations points earned in last week's 18-14 win over Great Britain in Christchurch, in which Fien started at hooker.
The for and against points recorded in the match have also been expunged, the RLIF said.
Fien, who made his Test debut for the Kiwis a week earlier against Australia in Melbourne, immediately left the Kiwi camp and was believed to be returning to his native Townsville in far north Queensland.