National Liberal Party powerbroker Brian Loughnane allowed political donations banned in NSW to be funnelled through federal party channels, the NSW corruption watchdog has heard as two more state MPs fell on their political swords.
The Independent Commission Against Corruption (ICAC)on Wednesday resumed hearings on Operation Spicer, an investigation into allegations NSW Liberal Party figures tried to circumvent fundraising bans ahead of the 2011 state election, which was won by the coalition.
Counsel assisting the ICAC Geoffrey Watson SC told the inquiry Federal Liberal Party director Mr Loughnane gave the green light for the use of federal avenues to sidestep the NSW ban on donations from property developers.
An email shown at the inquiry suggested Mr Loughnane - the husband of Prime Minister Tony Abbott's chief of staff Peta Credlin - agreed to filter banned donations through the Canberra-based Free Enterprise Foundation.
"Brian Loughnane has agreed that for the time being the Fed Sec (federal secretariat) will operate on the policy ... in effect, there is no benefit for a NSW donor to donate to via the Fed Sec, unless they are a property developer," the July 23, 2010 email written by federal Liberal executive Colin Gracie to then-NSW Liberal party finance director Simon McInnes said.
Property developers have been banned from making political donations in NSW since 2009.
"It seems the federal party was willing to allow itself to be used in that way," Mr Watson told the inquiry.
"In particular, we will be examining most or all of the members of the Liberal Party finance executive."
But NSW Liberal Party state director Tony Nutt said the email exchange related to a "potential donor", who was not a property developer, and any funds were intended for an election campaign in the federal seat of Banks in NSW.
"The potential donation was not for a state election," he said in a statement.
The stench from Operation Spicer, which has resumed after breaking in May, continues to claim political scalps in NSW.
By the end of Mr Watson's two-hour-plus address, two state MPs - government whip Andrew Cornwell and Newcastle MP Tim Owen - had stood down from the party as the ICAC heard allegations of "serious irregularities" in their 2011 NSW election campaigns.
Mr Watson said there would be evidence Mr Owen's campaign for the seat of Newcastle was partly funded by illegal sources, while there were serious irregularities in electoral funding in Mr Cornwell's neighbouring seat of Charlestown.
Mr Cornwell has told ICAC he was given $10,000 in a brown paper bag by Newcastle mayor Jeff McCloy while sitting in the mayor's Bentley in the lead-up to the 2011 NSW election.
Mr Watson said Mr Cornwell passed the money to a Liberal party colleague.
The bag was described as either a brown paper bag or brown envelope full of $100 notes.
Mr Cornwell is due to give evidence at the ICAC on Thursday.
Councillor McCloy declined to comment on the allegations.
Mr McCloy, property developer Hilton Grugeon and businessman Nathan Tinkler are also alleged to have made illegal campaign donations to the Liberal party in the form of sham invoices.
Beyond Liberal Party figures, the corruption inquiry also heard of former NSW Treasurer and Ports Minister Eric Roozendaal's brazen attempts to advance Mr Tinkler's proposal for a coal terminal in Newcastle.
"There will be evidence of Mr Roozendaal meeting with representatives from Nathan Tinkler's company Buildev, and, somehow, documents provided by Buildev wound up in the re-made treasury advice," Mr Watson said.
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