In this story

It was at the end of January 2012, when would-be state Liberal Party candidate Matthew Lusted became convinced he’d been an unwitting party to electoral fraud.

According to his statement to the New South Wales Independent Commission Against Corruption, Lusted first shared his concerns with Hollie Hughes, a member of the NSW party’s state executive, who already had her own suspicions about the operations of party powerbroker Chris Hartcher.

After hearing him out, Hughes gave her advice. “I’m not going to take on Hartcher,” she said. “This is a job for Bill.”

If anyone was going to sort out Hartcher and his crew, it would have to be Bill Heffernan, the hardest of the federal party’s hard men, pugnacious enforcer for prime ministers John Howard and Tony Abbott.

And so, a week or so later, Lusted and Heff spoke about the $5000 donation Lusted had made a year earlier to, he thought, the state party.

In fact, it had gone to a company called Eight By Five, with which Heffernan was not familiar.

Heffernan had previously acted as something of a mentor to Lusted, at the suggestion of no less a personage than Abbott. But as they spoke, he was appalled.

For a start, being a property developer, Lusted was banned by NSW law from making political donations, a fact of which the tyro politician was apparently unaware. For another thing, Lusted told him the donation had been solicited by a Hartcher aide, Ray Carter, who would have to have been aware of the electoral laws.

After Lusted faxed a copy of the receipt to Heffernan, it was clear things were much more serious than that. The receipt carried an invalid ABN. It said the money was received as payment for goods and services provided, rather than as a political donation. And the mobile phone number on the receipt belonged to another Hartcher staffer, Tim Koelma.

Heffernan recalls his reaction this way: “I said ‘Holy shit!’ ”

He rang party head office – making a contemporaneous note as he did so, and telling them to do the same – and warned that he was passing on information that would have to be reported to the state’s electoral funding authority. Then he rang the authority to tell them it was coming.

They in turn passed it to ICAC. The seed of massive destruction had been planted.

1 . Preselection battles

Meanwhile, Heffernan himself began demanding answers from others in the state branch of the party. His question was simple, he tells The Saturday Paper: “Who the fuck is behind Eight By Five?”

“And the state director, the secretariat, and the president, who was Sinodinos, didn’t seem to be able to get me an answer,” he says. “So I took it into my own hands. Next thing they’re trying charge me with assault.”

He is referring to what happened about six weeks later when he, along with Arthur Sinodinos and state director Mark Neeham ventured deep into Hartcher territory, to a May 5 party meeting at Wamberal, near Terrigal, on the NSW Central Coast.

Officially, they were there as emissaries of Abbott to calm local party members upset about two candidates being parachuted against their wishes into the federal seats of Robertson and Dobell. For Heffernan, it was also a chance to pursue an answer to his question about who was behind Eight By Five.

The irony is, of course, that Sinodinos, who travelled with him to that meeting, could or at least should have been able to provide the answer. A company of which Sinodinos was a director and later chairman, Australian Water Holdings – itself the subject of ICAC investigation – had funnelled more than $180,000 into Eight By Five over the previous couple of years.

At the May 5 meeting, local members were not calmed; indeed, things got quite heated. Ray Carter, the same bloke who solicited the dodgy donation for Eight By Five, later complained to police that Heffernan assaulted him and subjected him to homophobic abuse.

Police quickly dropped the case for lack of evidence, but not before Carter’s statutory declaration relating to the incident was mysteriously leaked to the Murdoch press. Oh, they fought hard to stop head office from asserting its will over the Central Coast fiefdom of Chris Hartcher.

One branch member in Robertson, Denis Pogson, went to the Supreme Court to try to stop head office from sticking its nose in. He was lauded by right-wing media commentators as a champion of grassroots democracy: “aggrieved”, in the words of one, “after having his vote and his branch vote treated like garbage”.

It subsequently emerged that Pogson shared a home address with none other than Ray Carter. This was not a fight for grassroots democracy at all – it was a fight to some extent about ideology, but mostly it was about power.

It was a fight between the heavyweights in head office and the heavyweight of the Central Coast, Chris Hartcher, minister for resources and energy, special minister of state, and minister for the Central Coast in the government led by then premier Barry O’Farrell. A fight between the dominant moderate faction of the NSW party, of which O’Farrell was an unaligned member, and one of the leaders of the party’s hard right.

The grassroots were collateral damage. As the old Kenyan proverb goes, when elephants fight, the grass gets trampled.

2 . Factional hatreds

These factional fights have been going on forever. At the moment the moderates are on top because the right split a few years ago. The personal hatreds – the word used by several sources – go back decades.

As one right-winger, who is not part of Hartcher’s subfaction, attested: “Hartcher and O’Farrell have hated each other for 20 years. Hartcher and Heffernan hate each other.”

The difference this time is that ICAC has become involved, with the result that it is not only the grassroots that have been trampled. A whole herd of the elephants have been, too.

Four state Liberal MPs have been stood down: Hartcher himself, after ICAC raided his offices last year, and three of his acolytes – Darren Webber, Chris Spence and Marie Ficarra – as a result of allegations they benefited from improper donations.

“Hartcher and O’Farrell have hated each other for 20 years. Hartcher and Heffernan hate each other.”

O’Farrell quit the premiership after having admitted to giving false evidence to ICAC about his receipt of a $3000 bottle of wine from Liberal fundraiser Nick Di Girolamo. And Sinodinos, once a star of the federal Liberal ministry as assistant treasurer, has stepped down, too.

The list of those whose names have been mentioned in ICAC grows by the day, among them two state ministers and one federal MP.

Beside them, a bunch of senior figures in the party organisation, and Liberal-connected lobbyists and fundraisers, including one who is close to and has raised funds for both the new premier, Mike Baird, and Prime Minister Tony Abbott.

Counsel assisting the ICAC inquiry Geoffrey Watson, SC, named Nathan Tinkler and his company Buildev as having given $66,000 to Eight By Five. The Gazal family’s Gazcorp gave $137,000. Sinodinos’s company, Australian Water Holdings, linked to both corrupt former Labor minister Eddie Obeid and Di Girolamo, gave $137,000. Another big name, Harry Triguboff’s Meriton, paid $50,000 into another Liberal Party slush fund, the Free Enterprise Foundation, with half the money being redistributed to the federal Liberal party and half to the state party.

Dozens of other property developers, too, kicked in to Liberal Party slush funds.

As Watson summed up in his opening address: “Commissioner, this inquiry will expose the systematic subversion of the electoral funding laws of NSW.”

An important point needs to be made here. Only in NSW are such donations illegal, as a result of changes made by the former Labor government to the Electoral Funding Act in December 2009, making property developers and their associates “prohibited donors”.

Later, donations were barred from tobacco, and liquor and gaming interests.

In 2011, caps were placed upon the amount that could be donated by everyone else: $5000 to a political party and $2000 to a particular politician.

The Liberal Party was never happy about the ban on developer donations, as is evident in a letter circulated at the time, to which Sinodinos was a signatory. It informed recipients of the changes, and complained they were designed to cut the party off from one of its major sources of funds.

As Watson told the inquiry, it was Hartcher’s man Koelma who found what appeared to be a way around the prohibition on donations from property developers. Instead of getting them to kick directly into the Liberal Party, they would pay dummy company Eight By Five for fake “services” rendered. Thus laundered, the money would be redistributed to favoured candidates. In turn, favours would be done for the donors.

Some $400,000 was raised this way before Bill Heffernan blew the whistle. But as ICAC’s investigations progressed, it became clear Eight By Five was not the only fundraising vehicle being used to subvert the law. And it wasn’t only Hartcher’s people involved.

The NSW party’s main fundraising arm, the Millennium Forum, was bundling donations and forwarding them to the Free Enterprise Foundation, based in Canberra, which sent the money back to the state branch, minus inconvenient identifying details.

As Watson noted, before prohibition of some donors, FEF gave little to the state party. But in 2011, after the law changes, its contribution suddenly jumped to $700,000.

“There will be evidence,” Watson told the commission, “that Chris Hartcher’s office used the Millennium Forum and then the Free Enterprise Foundation to rechannel around $165,000 in donations received from property developers mainly from the Central Coast. More disturbing will be the evidence that some of these donors had planning applications in the pipeline at the time that the donations were made.”

The former chairman of the Millennium Foundation, prominent lobbyist Paul Nicolaou, is another trampled elephant, linked not only to the laundering of donations but to an effort to enlist right-wing shock jock Alan Jones to traduce on-air the head of Sydney Water, Kerry Schott. An honest bureaucrat, Schott was an obstacle to the development ambitions of the Sinodinos-Obeid-Di Girolamo company AWH.

3 . Business donations

The allegations of dirty dealing roll on and on. They are too numerous to detail here. But Watson’s opening address is available on the ICAC website: he is not only a forensic legal mind, but an entertaining raconteur.

The most immediate political consequence of these allegations is that the hard-right faction of the Liberal Party, and particularly that part of the faction controlled by Hartcher in the Central Coast, is now pretty much a spent force.

As one source said: “The Central Coast has operated like a law unto itself for a long time. Hartcher for years separated himself from the party. I don’t know how he was allowed to get away with it. It was like an independent kingdom up there. It’s a bit like Obeid. His power grew until there was nothing anyone could do about it.”

The result was candidate selection not based on ability, but on “being willing to do whatever he said”.

Another source, this one on the left, voiced the same complaint about candidates. Some, he said, he would not pass preselection “for the Motoring Enthusiast Party”.

But the demise of the Hartcher faction is cold comfort. As the right-wing source put it: “It’s gone way beyond factions now.”

Indeed it has. The NSW division of the Liberal Party is in a state of panic. It is a measure of that panic that new premier Baird promptly supported Watson’s suggestion, at the end of his opening address to ICAC, that public funding might be an option to limit corruption.

To give Baird his due, he had toyed with reform for some time before this. But harder heads in the party have always hated the idea, for the simple reason that the conservatives have traditionally had a huge advantage over their opponents when it came to fundraising.

While Labor gets money from the trade union movement – about one-third of total receipts – this does not compensate for the much deeper pockets of corporate donors.

In the past four federal election cycles, the Labor party received much less money than the Liberal and National parties. In 2001, it was about 69 per cent of what the Coalition raised. In 2004, it was 73 per cent. In 2007 it was 80 per cent and in 2010 it reached 83 per cent. The same holds broadly true for the states.

While business donations to some extent follow power, and tend to be made more to those in office or those likely to come to office, there remains a heavy bias towards the conservatives.

A study published in August 2008 in the Australian Journal of Political Science by Dr Iain McMenamin analysed Australian Electoral Commission data on payments to parties by 450 large businesses over seven years at the federal and state levels, and sought to quantify this bias.

“Heading into an election with a 10-point lead, the ALP can only expect to share business contributions equally,” McMenamin’s paper says. “However, with the same 10-point lead in an election year, the Coalition can expect that over 90 per cent of businesses will bias their contributions towards the Liberals and the Nationals.”

As you might gather from those figures, things have to be pretty crook for the conservatives to even contemplate any move that might undermine that traditional advantage.

The fact of the matter is that the conservative parties have generally led objections to any move that would either limit the flow of funds or open up to greater scrutiny the source of those funds. That is not to say Labor does not have its slush funds, too. But it has always been the conservatives who most strongly oppose greater openness in the electoral funding system.

Joo-Cheong Tham, associate professor of law at Melbourne University, has been studying Australia’s electoral systems for 15 years.

“It’s very clear the federal Liberal Party is much more resistant to public disclosure than Labor,” he says.

And while he generally supports the idea of greater public funding and tighter controls on other donations, Tham questions how much good it will do, absent other measures.

For one, the real identities of donors should not be able to be obscured by laundering operations, such as the Free Enterprise Foundation. For another, donor information should quickly be made public. In the United States and Britain, Tham says, donations are made public within days of receipt. In Australia it is frequently more than a year, if at all.

“And breaches are not attended by sufficiently serious penalties,” he says. “Some examples: a lot of offences require proof of knowledge, being reasonable doubt. So party officials are often wilfully ignorant, so would not be caught. [In NSW] even if you can show the offences were based on knowledge, the maximum penalty for a party is $22,000, and for an individual it is $11,000. Given the amounts involved, this is derisory. The same applies under the Commonwealth scheme. Ten thousand is the maximum fine.”

Given the difficulty in proving breaches, and the minuscule penalties that apply, the regulatory authorities hardly ever prosecute. Tham again: “They’ll be spending maybe hundreds of thousands, to get what? A $10,000 fine?”

There are other things that need fixing, he says, including more comprehensive and accessible registers of the interests of politicians. Also, making public information on meetings between public officials and lobbyists, something ICAC has previously advocated.

4 . ICAC exposes schisms

The great irony of the current woes of the Liberal Party, of course, is that they are only happening because NSW has two things other state and the Commonwealth systems lack: a strong public watchdog in ICAC, and an electoral system that outlaws things that are legal elsewhere in the country.

NSW may not actually be politically dirtier but simply looks that way because, as Tham says, “there are more laws to comply with”.

“Victoria, for example, is completely unregulated. Parties are free to take from property developers any time they want to… I’m not saying it’s as bad or worse elsewhere. All I’m saying is we don’t know, because we don’t have strong investigative agencies and strict funding laws.”

It is a frightening thought. It’s entirely possible that there are analogues of Chris Hartcher all over the country, and we just don’t know about them.

In NSW, of course, ICAC has not just exposed these practices. It has exposed the vicious system of factions that underpins them. Already, a premier is gone, on the wrong side of a feud now playing out in a Castlereagh Street hearing room.

News of O’Farrell’s undeclared gift had threatened to play out in the papers before it reached ICAC, just as Heffernan’s alleged assault had. The Daily Telegraph knew about the bottle of Grange in March, and its state political reporter asked the premier in a text message whether Di Girolamo had given it to him. A month later, he was undone by the same information as it appeared in ICAC.

Di Girolamo said he had told nobody but his wife about the present. Geoffrey Watson asked if he had maybe armed a politician with this fatal information – perhaps “a fellow called Hartcher?’’ He denied this, too.

And so did Chris Hartcher: “Accusations that I am the source of the leak concerning the $3000 bottle of wine are incorrect and scurrilous.”

They are on opposite sides of a 20-year war, Hartcher and O’Farrell. Politically, they are both now dead.