Xiaoli Xue, 36, has been accused of fraudulently inflating her income to secure 10 home loans worth almost $7 million since 2020.
She then allegedly laundered funds from organised criminals in the illegal tobacco trade via the repayments.
Following her arrest at Berala in the city's west, police raided two properties, seizing $2.5 million worth of cigarettes as well as loose tobacco, more than $100,000 in cash and a luxury SUV.
An illegal gambling den and an unlicensed tattoo parlour believed to be linked to the organised crime group were also uncovered, police said.
NSW Police Financial Crimes Squad Commander Gordon Arbinja said the use of fraudulent mortgages showed the lengths organised criminals would go to conceal their activities.
"We will not tolerate criminals who undermine the integrity of our financial system," he said.
Xue was granted bail in Burwood Local Court on Friday after being charged with charged with 20 fraud and criminal proceeds offences.
She will have to hand over passports and report to police daily, while $100,000 will need to be deposited to secure her release.
Xue is due to face court again on April 30.
The seized assets have been frozen and the state of NSW will attempt to claw back the alleged criminal proceeds.
The arrest comes after an investigation into seven properties spanning more than six months.
In November, state police revealed there had been a string of attacks on tobacconists in northern NSW, sparking fears Victoria's cut-throat turf war over the illicit cigarette and vape trade had spilled across the border.
More than 100 arson incidents in the southern state have been linked to Middle Eastern organised crime syndicates and outlaw motorcycle gangs fighting to control the black market.
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