The underworld barrister, known as Lawyer X, had been informing to police for years before they asked her to become a witness against former drug squad detective Paul Dale over the 2004 murders of Terence and Christine Hodson.

By 2008 Ms Gobbo, an associate and sometime legal confidante for the officer, had passed valuable information to investigators about her conversation with Mr Dale, including helping them establish a "corrupt relationship" between the officer and underworld killer Carl Williams.

She secretly recorded a conversation with Mr Dale in early December that year, providing police "no admissions but some material of interest", an inquiry into police use of informers has heard.

But investigators told her she was their only credible witness and they needed a statement.

Ms Gobbo was reluctant, fearing she could be called as a witness in court and her informing would be exposed or her legal reputation damaged.

After weeks of convincing she agreed.

"She asked my advice and I told her I thought she should," a former senior handler known as Sandy White told an inquiry into police use of informers on Monday.

He was following instructions from then-assistant commissioner Simon Overland to encourage her to make the statement, he said.

Ms Gobbo initially included her involvement in proactively recording Mr Dale, but Mr White suggested she take it out before signing the statement.

Police could then claim privilege over police methodology to avoid disclosing her active involvement to Mr Dale's future defence team, or in court.

"That's a pretty unethical suggestion," counsel assisting Chris Winneke QC said.

"Well, on the face of it, I would agree with you," Mr White replied.

"I can't give you an explanation as to why I said that."

Mr Dale was later charged with the murders. Charges were dropped in 2010 when Williams was murdered in prison. Ms Gobbo never gave evidence.

Earlier it was revealed Ms Gobbo once told handlers an underworld client had wanted her to stash $100,000 cash for him.

But when the man later claimed from prison she was holding $280,000 she denied it.

Mr White said given the possibility the money was proceeds of crime "it definitely should have been examined".

But police records appear to show that did not happen, Mr Winneke said.

Ms Gobbo had been known to carry large sums of cash. She was found with $15,000 in her car boot at Barwon Prison in mid-2006 and it was reported when her car was set on fire in April 2008 that police seized large amounts of cash from it at the time.

Australian Associated Press