THE state's most secretive law enforcement agency has been sharing the proceeds of crime with organised crime figures, cutting deals that allow them to walk away with millions of dollars.

The NSW Crime Commission, set up to investigate and jail Sydney's crime lords, has struck as many as 600 such deals during the past 20 years, in effect, handing over millions of dollars' worth of assets that might have been illegally obtained.

The funds taken by the commission are put in a Treasury account and disbursed to crime prevention and drug rehabilitation programs.

But instead of litigating in open court to confiscate all proceeds of crime, the agency has settled most cases by consent for a lesser amount and often before a defendant appears on a criminal charge.

For senior figures in the underworld, it has become a cost of doing business. The Herald has confirmed that in one recent case, someone with criminal associations approached the commission to pay a financial settlement - before he was even called in to give evidence.

The Herald has also learnt that such deals, struck under proceeds of crime laws, have not always been inspected by a Supreme Court judge as envisaged by the legislation but merely stamped by a court official.

A defence lawyer, Dennis Miralis, said there was a ''prevailing view'' within the criminal world that by reaching a secret deal with the commission, it was possible to avoid further police scrutiny. ''They believe that by settling with the crime commission on a non-admission basis, they will remove the commission from investigating their affairs any further,'' he said.

''One advantage of settlement is that individuals can effectively have funds returned to them that are now 'clean' and have been sponsored and endorsed as such by the state.''

While the value of the assets the agency confiscates has grown by more than 1300 per cent since 1990 - generating almost $250 million over that period - the number of people it has arrested has plateaued, falling last year to fewer than the number in 1993.

A former commission investigator and now police academic, Michael Kennedy, said: ''It is philosophically unsound what they do. They are licensing organised crime because they are fining it. The Crime Commission is involved in business transactions.''

The agency - which taps phones, can compel witnesses to answer questions and maintains an army of criminal informants - has operated for two decades with less oversight than even the domestic spy agency, the Australian Secret Intelligence Organisation. The Herald also understands several prominent organised criminals have been able to avoid greater police scrutiny, a bigger confiscation bill or more severe legal penalties by becoming an informant. A 12-month investigation has discovered:

An ''ends justify the means'' culture exists at senior levels. It manifests itself in inadequate record keeping, the routine relaxation of policies governing the handling of informants and inaccurately reporting its financial achievements.

A murder investigation into a prominent Lebanese mafia figure was thrown into disarray, NSW police say, after the commission warned his lawyer that one of the criminal's most-trusted friends had rolled over.

An entrenched distrust of the agency among senior members of the Australian Crime Commission, the federal police and the NSW Police, over disputes about the management of complex investigations.

Since 1993, the commission has been run by Phillip Bradley, who is respected in government circles as a hard-working anti-crime crusader. And despite its problems, his organisation is one of Australia's most effective criminal intelligence agencies.

Its supporters say confiscating criminal proceeds is the only way to put pressure on well-organised criminals with experience of police methods - and the Supreme Court has encouraged such settlements because of the heavy caseload in the courts.

But critics say such deals do not make a dent in the amount of drugs sold in Sydney and, as they are struck in private, do little to deter crime.

The commission's oversight body, a management committee that consists of Mr Bradley, the police minister and the heads of NSW Police and the federal police, has not always been able to scrutinise properly the organisation or the financial settlements it has struck.

Another former commission officer, Peter Robinson, said it was compromised because it was trying to juggle competing priorities - the confiscation of assets and the investigation of organised crime.

''The concept of taxing organised crime, or skimming off the top, and leaving crime figures to keep the rest of their spoils sounds like a protection racket. If the commission is doing that, it is encouraging crime and fostering a culture where organised crime can flourish.''