Two men have been charged with fraud and another two have been questioned in a multi-million-dollar Australian Federal Police (AFP) counter-terrorism and fraud investigation that has exposed gaping holes in Australia's childcare system.

The AFP this week raided the Lakemba family day care businesses of brothers Mohammad and Ibrahim Omar, aged 27 and 25, over more than $27 million in Commonwealth childcare benefits and rebates claimed since 2012 by the nearly 600 home providers of family day care on their books.

Counter-terrorism police are investigating whether millions of dollars in childcare subsidies and rebates have been rorted and sent offshore, under the noses of federal and New South Wales education, welfare and health authorities.

Do you know more about this story? Email sean.r.dunlop@abc.net.au

Administrator arrested while preparing to travel to Saudi Arabia

Two family day care educators on the Omars' books were arrested this week and charged with defrauding the Commonwealth.

The AFP this week raided the Lakemba family day care businesses of brothers Mohammad, left, and Ibrahim Omar.

One of the men, 22-year-old Ali Assaad, is the secretary of Sydney charity Dar al Quran wa Sunnah, which employed a man accused by Lebanese authorities of funding the Islamic State terrorist group.

Police allege Assaad collected more than $152,000 in child care benefits in the past financial year and claimed to be looking after children in his Moorebank home in Sydney's south-west when he was actually in Kuala Lumpur, Malaysia.

Assaad, an administrator at Sydney Islamic centre Markaz Imam Ahmad, was preparing to travel to Saudi Arabia when he was arrested on Wednesday.

He was released on bail by a Sydney court on Thursday night on the conditions he surrender his passport to the AFP and not attempt to leave the country.

The main target of the AFP investigation was 26-year-old waterproofer Hussain Dandachi, who was arrested in a raid on his Old Guildford home on Thursday night.

The investigation, codenamed Operation Rheinfels, was launched last October after Dandachi was blocked from boarding an international flight at Sydney Airport and his passport was cancelled.

Dandachi faced a Sydney court on Friday charged with obtaining financial advantage by deception, dishonestly causing loss to the Commonwealth and making false or misleading statements in an application.

7.30 understands police have not located the funds that have been allegedly defrauded.

The AFP is expecting to make more arrests as part of the investigation.

The alleged scam

The AFP raided Play School Family Day Care on Wednesday.

AFP investigators are scouring the records of Mohammad and Ibrahim Omar's family daycare companies and their nearly-600 home family day care providers, which were seized in raids across Sydney this week.

Police are investigating providers for claiming benefits and rebates for children that never existed, were documented as being cared for by several providers at once and had falsified immunisation records.

Each child is required to have a customer reference number, which can only be obtained by visiting a Department of Human Services centre and providing identity documents including a birth certificate and a bank statement.

The family day care scheme is overseen by the federal Education Department but regulated by state education departments, which are responsible for inspections of providers.

Family day care educators can look after up to seven children in their own home and must pass criminal history and Working With Children checks.

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The charity

Police say that during three periods between August 2015 and May 2016, Ali Assaad claimed to be looking after children at his home in Moorebank in southwest Sydney.

However, on all three occasions, Assaad was in Kuala Lumpur, Malaysia.

He was working for Australian charity Dar al Quran wa Sunnah in Kuala Lumpur on some of the dates identified by police.

The charity, which has been operating in Australia since 2012, describes itself on its Facebook page as a community project bettering the Muslim community through education and aid.

Last July, the ABC revealed Dar al Quran wa Sunnah was accused by Lebanese authorities of alleged links to Islamic State (IS).

Ali Assaad told police he did go to Kuala Lumpur three times, but says his wife or mother-in-law took over his child care duties.