A Sydney property developer who appeared before the Independent Commission Against Corruption (ICAC) today began donating tens of thousands of dollars to the federal Liberal Party after developer donations in New South Wales were banned, in a case that highlights a loophole in disclosure laws.

Prior to the ban, Tony Merhi disclosed generous donations to council and state campaigns, declaring $89,500 worth of donations on development applications to the Hills Shire Council from February 2007 until around the time of Sydney's local government elections in September 2008.

But after political donations to NSW branches of parties were made illegal in 2009, companies linked to the prominent developer began funnelling money federally, donating at least $61,500 to the Liberal Party of Australia between July 2010 and August 2013.

ICAC has been investigating allegations that Liberal MPs, including former NSW energy minister Chris Hartcher, took donations for favours in the lead-up to the 2011 election.

Today, it again heard evidence from the head of a foundation allegedly being used to "rinse" banned political donations, the Free Enterprise Foundation.

Tony Shepherd, the chairman of Liberal Prime Minister Tony Abbott's Commission of Audit, was among those who had donated to the foundation, the inquiry heard.

Foundation trustee Anthony Bandle, who has been questioned at ICAC hearings over alleged ways in which Liberal Party figures have skirted electoral donation laws, yesterday admitted that he sometimes received cheques to the foundation from donors asking their money be re-donated to the Liberal Party.

He insisted that as trustee he had the discretion to decide what to do with the money, but agreed that he had never refused such a request.

Foundation did not 'rinse' political donations: trustee

Mr Bandle denied that he had done anything unlawful.

He also conceded that he had never checked to see if donors would be banned from making donations to political parties under state laws.

The inquiry has heard that that the foundation donated more than $700,000 to the NSW Liberal Party in the lead-up the 2011 election, but no one in the party asked questions about what the foundation was or what it stood for.

Counsel Assisting Geoffrey Watson SC asked: "So are you telling us that there has never been an occasion in 33 years that the Liberal Party asked what lay behind the FEF?"

Mr Bandle replied: "I would have thought they knew what it was all about."

The inquiry heard the foundation had no website and no phone number.

"Could it be because the Liberal Party is behind the FEF?" Mr Watson asked.

To which Mr Bandle replied: "No, it's not."

He conceded that the foundation was declared as an associated entity of the Liberal Party, but insisted the association was not formal.

He told the hearing that he sometimes spoke to figures in the Liberal Party to tell them the Foundation had made a donation.

He said those people included federal director Brian Loughnane, former fundraiser Paul Nicolaou from the Millennium Forum, and finance director Simon McInnes.

Mr Bandle told the hearing that he did not believe what he was doing with the foundation was unlawful.

Commissioner Megan Latham replied, "Well, that doesn't count for much, does it?"

She said it was not up to him to decide whether any laws had been broken, but added that the commission had no intention of pursuing findings against each and every person who had broken electoral funding laws.

Electoral law 'loophole' an understatement: expert

Associate Professor Joo-Cheong Tham of the University of Melbourne says that while property developers are not prohibited from donating to federal branches of parties, there is no certainty that donations from developers are not being used directly or indirectly for NSW election campaigns.

"Describing it as a loophole really understates the matter," Professor Tham said.

He said federal parties were not required to disclose the source of funds when transferring them to a state branch.

"The regime in New South Wales is strict, but what we have really is a parallel universe at the federal level which is virtually unregulated," he said.

"This is not a loophole, this is something far bigger than a loophole."

The federal Liberal Party has not responded to questions over whether any of the funds donated by Mr Merhi were used for state or local government campaigns in NSW.

A senior source in the NSW branch of the Liberal Party has told the ABC that the federal and state divisions of the party are subject to, and comply with, the law.

Professor Tham says the federal system needs reform.

"What needs to urgently happen is better regulation at the federal level that is coordinated with state regulation so that donations to federal elections do not become this very easy and perfectly legal way to actually avoid what are proper restrictions on the funding of politics," he said.

Mr Merhi has links to the developer Dyldam Developments, as well as a number of other entities, including Stamford House 88 and Rainbowforce.

Mr Merhi's lawyer declined to comment on the donations to the federal Liberal Party.

Mr Watson has described Mr Merhi as a "major" property developer who once boasted of having $1 billion worth of projects in the pipeline.

Conflicting accounts of donation to alleged slush fund

On the stand today, Mr Merhi faced allegations he knowingly wrongly donated $5,000 to the secret Liberal scheme Eightbyfive.

NSW MP Marie Ficarra stood down from the parliamentary Liberal Party last week after the ICAC heard she solicited the donation from the developer.

Ms Ficarra and Mr Mehri gave conflicting accounts of how he came to make the payment to the alleged Liberal Party slush fund.

Mr Mehri said Ms Ficarra told him he might need the services of a lobbyist to help with $1 billion worth of projects and recommended Eightbyfive.

But he says he ended up getting nothing "of any worth" for the money he paid and he "was duped".

But Ms Ficarra has insisted Mr Mehri wanted to contribute to the Liberal Party campaign and she told him as a developer he was a banned donor.

She said she suggested "his community" might able to help out the Young Liberals Flying Squad and put him in contact with Young Liberal Charles Perrottet.

Mr Watson accused Ms Ficarra of changing her evidence and "making it up as she went along".

In the 2010-11 financial year, Mr Merhi gave a $1,000 donation to former premier Barry O'Farrell, but a senior party source has told the ABC his staff recognised it was a prohibited donation and promptly returned it.

The Hills Shire Council records list only one $200 donation from Mr Merhi to the federal Labor Party after the state ban on developer donations came in.

Do you know more? Email investigations@abc.net.au