A senior Education Department director allegedly funnelled millions of dollars meant for public schools through a web of family-linked businesses, Victoria's anti-corruption commission, IBAC, has been told.

IBAC's Operation Ord has been investigating the use of money allocated to so-called "Banker Schools" between 2007 and 2014.

The Banker Schools system has been described as a "slush fund" for needy schools to pay for improved facilities and specialist programs.

At a public hearing, counsel assisting the commission Ian Hill QC outlined allegations that more than $2.5 million in public school funds were paid to companies linked to former department employee Nino Napoli.

Mr Hill said the final amount of public funds allegedly misused could be much more than the $2.5 million already accounted for.

"Investigators believe the amount of departmental funds used to make corrupt payments in the circumstances described will be considerably higher," he said.

Mr Napoli was the Education Department's director of school resources since 1992 and responsible for more than $4 billion of the department's $11 billion budget.

Get more stories like this Subscribe to get ABC News delivered to your email, including alerts on major breaking stories, daily wraps of the top issues and analysis and the latest stories on topics that interest you.

He was sacked by the Department of Education last week.

The commission has also heard explosive evidence that one of the department's most senior figures, former acting secretary Jeff Rosewarne, was involved in the alleged fraud.

The commission heard the invoices sent to schools for services from the family-linked companies were false.

It is alleged the money was used to pay for office furniture, overseas travel, wine and hospitality.

"In some cases these payments appear to have been entirely unrelated to department activities, or otherwise excessive," Mr Hill said.

"In other cases the position is less clear."

The Department of Education said it was deeply concerned by the alleged conduct and supported IBAC's investigation.

"Corruption has absolutely no place in any organisation and we want it gone from the Department," a spokesman said.

"We are determined to weed this conduct out.

"The vast majority of principals, schools and departmental staff are professional and hard working.

"The public deserves better than the allegations we have heard today."

Some principals 'knew' about fake invoices

The commission heard the companies involved in the alleged corrupt conduct were directed by Mr Napoli's cousins, brother and other relatives.

The schools involved in the transactions being examined include Chandler Park Primary School, Moonee Ponds West Primary School, Kings Park Primary School, Norwood Primary School, Sale College, John Fawkner Secondary College and Maribyrnong Secondary School.

The commission heard in some cases the school principals and business managers were aware the invoices were false.

Other schools were apparently not aware the invoices were fake.

Mr Hill said the allegations exposed serious probity concerns and pointed to cultural problems at one of Victoria's biggest bureaucracies.

"There is evidence that the level of honesty and integrity of senior department officers involved in the conduct referred to is considerably less than would be expected of public servants in the senior positions they hold."

Party payment listed as 'goods and services'

The commission has spent the day cross-examining Jeffrey Rosewarne, a former acting secretary at the department.

He also served as the interim chief executive of the Victorian Bushfire Reconstruction and Recovery Authority after the Black Saturday Bushfires in 2009.

Mr Rosewarne told the commission Mr Napoli was a "work colleague and a friend" whom he had known for more than 30 years.

He said he had also met several of Mr Napoli's family members, including his cousins whose companies are among those allegedly used for fraudulent transactions.

Mr Rosewarne was questioned about his 50th birthday party in 2007, which was held at the Apartment Bar and Restaurant in Melbourne's CBD.

He admitted he sent a $5,000 invoice for the party to Mr Napoli, who then sent it to his cousin's company to pay the bill.

The function was listed on the invoice as "professional development for staff conference".

Mr Rosewarne said he had asked Mr Napoli to lend him the money for the party because he was short of cash.

Mr Hill asked Mr Rosewarne about a $12,000 invoice he had requested for departmental printing work, which Mr Napoli passed to his cousin Carlo Squillacioti.

Mr Rosewarne denied the invoice for departmental work was used to "bury" a fraudulent payment for his birthday party.

Mr Rosewarne was also questioned about money he instructed the principal of Brighton Primary School to pay from banker school funds, for a $4,385 Christmas function for departmental staff.

He said he instructed the payment for the party to be listed as "goods and services" to avoid the possibility of the alcohol bill being the subject of a Freedom of Information request by the media.

"So you could hide from any public scrutiny the true nature of the transaction?" Mr Hill asked.

"Yes," Mr Rosewarne replied.

Mr Rosewarne also admitted he invoiced Moonee Ponds West Primary School for some furniture for his home.

The commission was also shown several quotes provided to Mr Rosewarne for departmental programs, all originating from Mr Napoli's cousin's companies.

Each quote used different letterheads but had the same contact phone numbers and email addresses and the content was identical.

The IBAC examinations will hear from more than 50 witnesses over the next six weeks.