The so-called "claims farmers" allegedly approached adults who spent time in youth prisons and former public school students, encouraging them to file false claims for compensation over historical child sexual abuse.
They are accused of coaching them on making fraudulent applications to the scheme through various Sydney law firms and allegedly received a benefit for referring the claimants on.
A 55-year-old man will face court on Thursday charged with 21 fraud offences.
Six others are due to face court in March after being arrested in a series of raids in western Sydney and on Queensland's Gold Coast on Wednesday.
A Sydney law firm was also raided with items seized by investigators.
Police believe a "significant portion" of the claims made were fraudulent, and the group stood to gain about $3.75 million, if the allegedly false claims had been paid out.
More arrests are expected as the investigation continues, NSW Police said in a statement.
The claims were made against the NSW justice department and education department alleging historical child sexual abuse.
A National Redress Scheme was set up in 2018 following the Royal Commission into Institutional Responses to Child Sexual Abuse to provide counselling, personal responses and payments to people who experienced institutional abuse as a child.
Government departments, churches, sporting groups and others are among the institutions who have joined the scheme, which is open for claims until mid-2027.
More than 44,000 applications had been made to the scheme as of July, which had paid out more than $1.4 billion to 15,000 applicants whose claims had been finalised.Â
Lifeline 13 11 14
Kids Helpline 1800 55 1800 (for people aged 5 to 25)
1800 RESPECT (1800 737 732)
National Sexual Abuse and Redress Support Service 1800 211 028
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