The defence team for Canberra lawyer Ben Aulich and accountant Michael Papandrea allege police used illegal actions and entrapment in an operation that led to charges being laid against their clients.
Mr Aulich and Mr Papandrea are both charged with conspiracy to launder money. Mr Aulich faces an alternative charge of recruiting others to engage in criminal activity.
The pair appeared in the ACT Magistrates Court on Thursday, where their lawyers asked to be allowed to challenge the undercover police operation, which resulted in the charges, and to cross examine witnesses.
The prosecution case is that Mr Aulich and Mr Papandrea made arrangements with an undercover police officer who had posed as a man needing to launder money from the sale of illegally obtained cigarettes.
The men are then alleged to have discussed the merits of several businesses, including cafes, supermarkets and panel beaters.
But Mr Papandrea's lawyer Sam Pararajahsingham told the court the issues were only ever discussed in a hypothetical way.
"Things were discussed at a level of generality," Mr Pararajahsingham said.
But he told the court that changed when another person, known as UC02, became involved.
Unbeknownst to the pair, he was also an undercover officer.
"The position shifts and UC02 takes an active and persistent role," Mr Pararajahsingham said.
He said the man had pushed for faster action, including asking for timelines.
"A question arises as to whether UC02 was acting within the terms of the [police operation] or his actions fell outside that," Mr Pararajahsingham said.
Mr Aulich's lawyer David Campbell said the arrangement with the undercover officer was "fictitious", which sought to create an offence and acted as a "most serious trap".
He told the court if it found there was entrapment and illegal activity, that would devastate the prosecution case in any future ACT Supreme Court trial.
"If we are right, this material will never be admitted," Mr Campbell said.
"The whole prosecution case will [collapse]."
But prosecutor Mark Tedeschi told the court the application was misconceived.
"The defence have not been able to point to a single illegal act," he said.
He rejected the claims there have been entrapment, and said after the undercover officer told them he had money from the sale of illegal cigarettes, the accused came up with the solution, of setting up a business to launder the money.
"They want to go on a fishing expedition," Mr Tedeschi said of the application to challenge the validity of the police operation.
"They want to explore the possibility that someone might have done something outside the scope of the authority."
The court has already refused Mr Aulich and Mr Papandrea's applications for a copy of the authorisation for the operation.
The pair will not know until January whether they will be able to cross examine police witnesses over their latest application.
