A man charged with fraud as part of an investigation into the suspected funnelling of millions of dollars in Australian taxpayer money to Islamic State (IS) was authorised to care for children in his home, despite being convicted of threatening to kill someone with a sword at a Sydney shopping centre.

Hussain Dandachi, 26, was charged last Friday with rorting more than $80,000 in childcare benefits for day care services that were allegedly never provided, as part of an Australian Federal Police (AFP) investigation into an alleged fraud syndicate suspected of funding IS.

Key points: Hussain Dandachi was last week charged with childcare fraud

Hussain Dandachi was last week charged with childcare fraud Arrested in April for threatening people with a sword at Campbelltown Mall

Arrested in April for threatening people with a sword at Campbelltown Mall Worked for day care network founded by Australia’s most senior terrorist Abu Sulayman

The revelations about Dandachi on Monday night's 7.30 program have sparked questions about how he continued to be authorised to work with children, despite being under close watch by counter-terrorism authorities and becoming involved in a standoff with police at gunpoint, in which he threatened them with a sword.

Dandachi was arrested last week in raids on a Sydney childcare network which was founded by Australia's highest-ranking terrorist, Mostafa Mohamad, who calls himself Abu Sulayman and is now a senior official for the Jabhat al-Nusra terrorist group in Syria.

The network has claimed nearly $27 million in government subsidies since 2012 and employs nearly 600 home providers of family day care.

Police have been unable to locate a massive portion of the $27 million and are investigating whether the money was defrauded to fund IS, potentially making Australian taxpayers one of the biggest funders of the terrorist group.

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The AFP uncovered the network after Dandachi, a 26-year-old waterproofing contractor, was stopped from boarding an international flight from Sydney late last year and his passport was cancelled.

Authorities suspected he was bound for the Middle East to join IS.

The AFP launched an investigation into Dandachi and discovered he was claiming tens of thousands of dollars in government subsidies to provide day care services in his home.

Dandachi allowed to work with children despite sword attack

Dandachi remained authorised to work with children even after he brandished a sword at Sydney's Campbelltown Mall in April and became involved in a tense standoff with police at gunpoint.

He had stormed into the shopping centre with the 85-centimetre sword and threatened to kill someone in revenge for a scuffle involving his family over their faith.

He was pepper sprayed by police and arrested at gunpoint after assaulting two officers.

Sorry, this video has expired Hussain Dandachi is arrested at the Campbelltown mall

Dandachi was handed a 12-month good behaviour bond last month for assaulting police and being armed with intent to carry out an attack, but even then, his Working With Children authorisation was not revoked.

Australian Childcare Alliance NSW chief executive Nesha O'Neil Hutchinson said the revelations showed the Working With Children check system across Australia was "inherently flawed" and "very much overloaded".

"Unless you have been convicted of a crime against a child, you will still pass your Working With Children checks," she said.

"Even if you are convicted of a crime or a threat or a risk against an adult, that doesn't mean under the current system that you'll have your Working With Children check cancelled.

"And even if you have been committed of a threat or a crime against a child in another state, that won't necessarily show up on a Working With Children check in each state, so the system itself has some flaws and some serious restrictions to it."

How the alleged fraud played out

Dandachi was employed by a network which is now owned by Sydney brothers Mohammad and Ibrahim Omar, who were also raided by the AFP last week.

Police believe the Omars' day care network was claiming government benefits for bogus children using fake Centrelink numbers, under the noses of the federal and New South Wales departments responsible for the scheme.

Abu Sulayman has become Australia's most senior terrorist in Syria. ( 7.30 Report )

7.30 has learned the network is also under investigation for allegedly falsifying immunisation records to circumvent Australia's new No Jab, No Pay laws.

A second day care provider, Ali Assaad, 22, was also charged with fraud last week as part of the investigation.

Assaad is the secretary of charity Dar al Quran Wa Sunnah, which is accused by Lebanese authorities of funding IS.

The charity is also the subject of an Australian investigation into the financing of the terrorist group.

'Taxpayers should be outraged'

Nesha O'Neil Hutchinson, chief executive of Australian Childcare Alliance NSW, said taxpayers should be "outraged" by the fraud allegations.

She said the Australian day care system remained open to exploitation, despite promises from successive Federal Governments to clean up the industry over the past decade.

"These scams have been going on for a while," she told 7.30.

"It has been known for a number of years in early childhood education with the federal funding system there is the opportunity to defraud the system.

"Taxpayers should be outraged because when you look at a figure like $27 million, at this service here, with the amount of subsidies we are receiving from the Government to support these children accessing early childhood education, that kind of money would be the equivalent for 60 children a day, seven days a week.

"It's 100 years' worth of subsidy. It is a phenomenal amount of money."

A Government report in 2014 found more than $7 million each week was rorted by day care providers.

Last year, police uncovered an alleged $16 million fraud by day care workers in Melbourne.

The federal Government claimed it had closed loopholes in the industry late last year.

Promises were also made to clean up the industry by former prime ministers John Howard in 2006 and Tony Abbott in 2014.