"Mr Nicolaou and Mr McInnes could hardly be alone. They must have been reporting to someone. We will try to get to the bottom of who knew what."

"Who was responsible for this misuse of the Free Enterprise Foundation, who else knew about it inside the Liberal Party?" he asked.

Outlining how Nicolaou and the NSW party's finance director Simon McInnes allegedly used the Millennium Forum and another fund-raising entity, the Free Enterprise Foundation, to launder banned political donations from property developers and others, Watson raised what he called "some pretty big questions".

The words spoken by counsel assisting the commission, Geoffrey Watson, in his opening address on Monday will have chilled many in the Liberal Party to the bone.

But that's not the worst of it. The party is bracing for a far bigger hit.

It is the question of who knew that is likely to see this inquiry go from an investigation of a slush fund, Eightbyfive, for the benefit of a few MPs on the central coast and their apparently power-hungry leader Chris Hartcher to a crippling hit on the Liberal Party brand in NSW akin to the damage done to Labor by the revelations about Eddie Obeid and Ian Macdonald.

It is true that the scale of the alleged wrongdoing is entirely different. Obeid sought to enrich himself to the tune of tens of millions of dollars from crooked dealings with his mates in the state government. Thus far no one in the Liberal Party has been accused of anything approaching that scale of corruption.

But what is engulfing the party may prove just as damaging: the suggestion that the party machine itself is guilty of using hundreds of thousands of dollars in illegal donations to win an election. As Watson alluded to, we're not talking a couple of rogue MPs here.

The great irony in all of this is that Barry O'Farrell was elected on a platform of cleaning up NSW politics after the Labor years. One of the central planks of his integrity agenda was reform of the political donation laws.

The timing of the alleged wrongdoing – just before the 2011 state election – means it is conceivable that while, as opposition leader, O'Farrell was promising bans on corporate donations to rid the state of the taint of money politics, the most senior officials in his own party were secretly rorting the donations rules to open the spigot on those same payments.