from The Australian

"HOURS after Bali's Sari Club was incinerated by terrorists, Rene Harris,
president of Nauru, was sent an extraordinary letter that would reshape the
destiny of the impoverished Pacific Island nation."

Click on the "More" link for the text of the Weekend Australian article.

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SECTION: FEATURES-COLUMN- INQUIRERPHOTOMAP; Pg. 29
LENGTH: 3072 words
HEADLINE: THE NAURU SOLUTION
SOURCE: MATP
BYLINE: Cameron Stewart, Martin Chulov
BODY:Copyright 2003 Nationwide News Pty Limited The Weekend Australian April 5, 2003 Saturday TC Edition

With the world focused on Iraq, the US has pulled off a quiet coup much
closer to Australia's shores. Cameron Stewart and Martin Chulov report

HOURS after Bali's Sari Club was incinerated by terrorists, Rene Harris,
president of Nauru, was sent an extraordinary letter that would reshape the
destiny of the impoverished Pacific Island nation.

Marked "most sensitive", it was written by a Washington-based lawyer named
Philip Gagner, who said he had been asked to convey a message given to him that
night by US government officials.

It was a secret proposal that promised to transform the miserable lot of the
21.2sqkm atoll, home to a diabetes-ridden population of 12,000 and best known as
a holding ground for Australia's asylum-seekers -- a proposal about which
Australia knew nothing.

The US, Gagner wrote, was fed up with Nauru's refusal to reform its offshore
banking system, which was being used by terrorists, including groups from
Indonesia, to transfer "significant monetary assets" across the world. The US
also wanted the island, desperate for new sources of income as its phosphate
mining industry peters out, to shut down a lucrative business in passports,
believing this, too, was being tapped by terrorists.

If Nauru were willing to meet these and other demands that would assist the
war on terrorism, the US would return paradise to the land once known as
Pleasant Island via "substantial economic assistance".

But there was a sting in the tail. If the islanders rejected the deal, the
US would invoke sanctions "sufficient to shut down the economy of Nauru".

*

HARRIS did not know it at the time but the US proposal would force his
nation, independent since 1968, to cede some of its sovereignty to US-appointed
officials. Nauru was about to learn some lessons about the US's willingness to
play hardball in the prosecution of its war on terrorism.

What happened next was worthy of soap opera. Six months of backroom
diplomacy -- pieced together from interviews with key players and from
confidential documents obtained by Inquirer -- tell an astonishing tale of
spies, dead presidents, standover tactics and possibly empty promises as a David
and Goliath of world affairs thrashed out the Nauru solution.

Unlike in the biblical story, David did not get lucky. In less than six
months -- with world attention focused on Iraq -- the US effected a quiet
colonisation in Australia's backyard. Not only did Washington get its way on the
anti-terrorism measures but it also took the opportunity to dragoon Nauru into
the service of its espionage and diplomatic activities. In return, the islanders
have so far got nothing, according to Nauruan politicians and diplomats. Nauru remains stricken by poverty and disease.

"We have been given the riot act by the US," says Nauru's former finance
minister Kinza Clodumar. "And we feel our sovereignty has been compromised -- no
doubt about that."

Harris, who lost office in January, tells Inquirer: "I think the CIA has
cornered the president and we have not had much choice [but] to do what we've
done."

Continued -- Page 34

From Page 29

The motivation for the US's move on Nauru can be traced to the September 11,
2001, terrorist attacks on New York and Washington and the Bali bombing last
October 12. Before September 11, Nauru's banking system was a favourite of
criminals across the world, especially the Russian mafia. To raise cash from
licensing fees, Nauru had registered about 400 offshore shell banks that had no
physical presence and offered clients great privacy.

AS a result, Nauru was in the sights of the Financial Action Task Force, a
group of 29 nations, including the US and Australia, that co-ordinates the
global fight against money laundering. Even so, it took September 11 to focus US
attention on such a minnow.

"After September 11 the looking glass changed completely from the American
side," Kinza Clodumar says.

In early 2002, the US defeated a bid by Australia to get Nauru off the FATF
list. But it was the Bali bombing that appears to have convinced Washington to
deliver the ultimatum that Harris received the same day.

"There is a genuine fear [in the US] of Nauru not being able to control the
banks we register and this was especially [the case] after the Bali bombing,"
Kinza Clodumar says.

On the evening of October 12, with the ruins of the Sari Club smouldering,
Washington prepared its pitch to Nauru -- with the carrot of extra cash in one
hand and a huge stick in the other. However, the Bush administration did not
want the plan to become public, lest it be criticised for rewarding the removal
of a banking system that should never have been introduced.

So rather than make the promise of aid through official channels, it used
informal, non-government conduits. This allows the US Government to state -- as
it does today -- that it has not made any formal promise of aid to Nauru in
return for banking reforms.

But as Nauru's ambassador to the UN Vinci Clodumar (Kinza's brother) wrote
in a confidential letter to President Derog Gioura three weeks ago, "the aid
package is the carrot for Nauru taking required actions to eliminate its
offshore banking service".

"However," he continued, "I must point out here that the package is not an
offer of the US Government but by private individuals who have access to senior
officials."

These people, he said, were "acting as [a] conduit to the targeted agencies
of the US Government". But, as Nauru was to discover, these conduits turned out
to be shadowy characters with powerful connections to key US intelligence and
government officials.

*

FIRST among them was Steven Ray, a burly American who Gagner had no qualms
identifying as an intelligence operative.

"Mr Steven Ray has worked closely in the past with US intelligence agencies
and he continues to work in this position," the Washington lawyer said in a
letter to Harris.

Ray, who had asked to be appointed Nauru's honorary consul in Washington,
has confirmed to Inquirer that he played a central role in bringing Nauru to the
negotiating table. Yet while his name appears on the Nauru government website as
its consul general in Washington, the US State Department denies it has received
any application from Nauru to appoint an honorary consul -- an oversight Ray
describes as a technicality.

Nauru's second mystery man is a New Zealander named Jack Sanders, who is
ostensibly an employee of US think tank the Hudson Institute. Sanders has roamed
the Asia-Pacific for at least the past seven years and is close to Ray. He also
appears to have manoeuvred himself into an influential position within the Bush
administration, offering to help with opening an embassy for Nauru in Beijing --
paid for up-front for two years.

"These persons ... are authorised to speak for their respective
governments," Gagner wrote to Harris.

Gagner, 52, works for Washington law firm Shaughnessy, Volzer & Gagner,
which has offices a few blocks from the White House. In his letters, he
describes himself as "a fair and honest messenger to Nauru".

However, he also has an apparent conflict of interest, as he represented
Transpacific Development Corporation, a company that oversaw Nauru's contentious
passports-for-sale system. His main client was a man named Paul Lee, who ran the
system.

The US State Department denies it has used Gagner as an intermediary. Yet
Gagner told Inquirer he could "neither confirm nor deny" his involvement.
However, Kinza Clodumar confirms that all three played a central role in the
negotiations.

*

TO Harris and his island government, the letters from Gagner and Ray may as
well have carried the seal of the Oval Office. Their letters determined Nauru's
actions.

On the evening of October 12 -- 24 hours after the nightclub bombing on the
other side of the world -- Gagner was summoned to a meeting of senior US
government officials in Washington and asked to convey a blunt message to
Harris.

"Some banking organisations chartered in Nauru have been involved with the
transfers of significant monetary assets [that] have to do with international
terrorism targeted against the US," Gagner wrote to Harris. "The message they
[US officials] wanted to convey was that the US was asking Nauru to co-operate
with it in an investigation of this situation."

Then came the kicker: "What we have here is both a threat and a promise for
the future. The threat is for major international sanctions to be taken against
Nauru for violation of international banking practices. These sanctions would be
sufficient to shut down the economy of Nauru, and would essentially eliminate
all trade in and out of Nauru.

"The promise, on the other hand, is that Nauru will receive substantial
economic assistance from the US and other countries in return for changes to its
banking practices."

Harris knew he had little choice but to agree to the US demands. "It's a bit
like everything else, they had their thumb on it," the former president says.
"If you don't co-operate to the best of your abilities ... I suppose you could
call it a threat."

Harris responded swiftly to Gagner's letter and within a week had sent a
delegation to Washington to meet US officials and their conduits. When the
Nauruans arrived in Washington on October 20, they found a powerful cast of
officials awaiting them, including Michael Horowitz, a former adviser to
president Ronald Reagan.

In every meeting the islanders attended, the message was the same: reform or
perish. The delegation returned home with no delusions about the seriousness of
the US position.

*

BARELY two months later, on December 20, the US backed its tough words with
tougher actions, singling out Nauru as the first nation liable for financial
sanctions under anti-terrorism legislation signed by President George W. Bush
after September 11 and known as the USA Patriot Act.

The sanctions would not come into effect until late April but, when they
did, Nauru would be ostracised from the US financial sector. The time bomb had
been set; Nauru's endgame had begun.

It could hardly have come at a worse time for the troubled island. On
January 8 -- the same day Harris wrote to US Secretary of State Colin Powell to
protest against the Patriot Act sanctions -- he lost a no-confidence motion in
parliament. A former president, Bernard Dowiyogo, was sworn in as Nauru's new
leader.

Harris argued the vote was unconstitutional and the decision was reversed.
The next 10 days were such a political circus that even the Australian
Government was unsure who was running the island 4000km northeast of Sydney.

Meanwhile, the Nauruan economy was sinking further into the mire. On January
31, Dowiyogo -- who had prevailed in the battle for the presidency -- declared
Nauru was unable to pay its public servants. The nation was effectively broke.

*

ONE of Dowiyogo's first acts was to write to Gagner seeking a briefing on all
dealings between the US and Nauru since October 2002. On January 29 he received
a reply -- an 18-page missive that left him in no doubt that much had been going
on. In front of him was a blueprint to bring Nauru back from the brink. On the
table was a 10-year, $250 million package for the ecological reclamation of "the
Nauru homeland", all but destroyed by phosphate mining.

Gagner pledged that Horowitz would champion this plan -- but added that no
US cheque would be written if there were ongoing problems with Nauru's banking
system. Also on offer was a scheme to refinance $3million in debt that had
grounded Air Nauru's only aeroplane. They would even throw in a merger deal with
South China Air, if that's what Nauru wanted.

As well as the new Beijing embassy, which Gagner said would facilitate
prosperous trade ties with China, the US was prepared to offer the same courtesy
in Washington. There was a catch, however: Ray would run the Washington mission
and Sanders would be the top man in Beijing.

By February the plans had firmed -- but the US could not pitch them as
straight-out grants. To circumvent this, Ray drafted a briefing note for Vinci
Clodumar that detailed what the nation should ask for.

This document amounted to a virtual management plan for the island. A new
dietary regime was requested; so was solar energy, a tuna fishery, schools,
housing and fresh-water facilities. But there was one highly sensitive codicil.

"In the region surrounding Nauru there are other island nations being used
by foreign governments as listening posts and satellite tracking centres," Ray
wrote." Nauru has agreed in principle to provide a location for similar
facilities to the US Government in return for the ability to broadcast to the
central Pacific via shortwave, the upgrading of their telephonic infrastructure
and the ability to di-plex satellite telecommunications and satellite internet
service signals as an alternative revenue source."

The US wanted to use Nauru as a spy station.

*

ON February 13, Gagner wrote to Dowiyogo with some startling news. The US
Government had told him that "the matter of bank sanctions against Nauru could
be resolved in a matter of days". Dowiyogo should travel to Washington
immediately.

Meanwhile, the US had taken the liberty of asking a Canadian attorney,
Thomas Richards, to act on Nauru's behalf to remove it from the FATF list.

But Gagner's letter also included a bizarre additional request from US
officials. In addition to banking reform, it asked that Nauru carefully consider
signing a so-called Article 98 Agreement to declare that both nations would
shield each other's citizens from the new International Criminal Court. This
request -- part of a global push by the anti-ICC US to get nations to sign such
agreements -- was unrelated to the issue of Nauru's banking and passport
practices. Like the listening post, Washington had just tacked it on to its list
of demands.

By late February, when Dowiyogo and his delegation arrived in Washington,
the Nauruans were fast losing control of the situation. They arrived to find a
draft of the proposed executive order -- which would end offshore banking in
Nauru -- had been prepared for them. Ray, Sanders and Richards were running the
show.

The extraordinary events of the next few weeks were detailed in a bitter
letter penned three weeks ago by Vinci Clodumar.

*

ON February 25, Dowiyogo had a mild heart attack and was taken to a
Washington hospital. Vinci Clodumar writes that on this day, instead of showing
the draft of the executive order to the Nauruan delegation as promised, Ray,
Sanders and Richards took it to the bedside of the ailing president. They were
embarrassed to discover Vinci Clodumar and another Nauru MP, Ludwig Scotty, in
the president's hospital room.

Earlier that day Vinci Clodumar had provided written advice to the president
that the US was discreetly linking the request for an Article 98 agreement with
its other demands. His advice was that Nauru would "lose its credibility in the
international community" if it signed such a deal. Therefore, it was worth doing
only "on the basis the US also signs off in writing its commitment to
[financially] assist Nauru".

But Nauru never got anything in writing. The next morning, February 26, when
the Nauru delegation -- including the president, who left hospital for the day
-- arrived at the State Department for talks, the islanders were taken into the
Treaty Room to sign the Article 98 agreement.

"This all took us by surprise, but rather than cause a commotion, president
Dowiyogo signed the agreement," Vinci Clodumar wrote.

For the next two days, according to Vinci Clodumar, the Nauruans were
earbashed by Ray's group and by US officials who oversaw all changes to the
executive order. Eventually, on the evening of February 27, Ray and a legal
adviser stood over Dowiyogo, who was back in hospital, while he signed the
document the US had chased for so long.

"Taking into consideration the sequence of events that led to the signing of
the executive order left no doubt in my mind that president Dowiyogo signed the
executive order under duress," Vinci Clodumar wrote.

The executive order provided for all the US had wanted by abolishing Nauru's
offshore banking and passports-for-sale schemes. It appointed Ray as honorary
consul in Washington, Sanders as charge d'affaires in Beijing and national
security adviser to the president, and Thomas as special legal counsel to the
president.

Dowiyogo was a spent man. On March 4 he underwent an 11-hour heart
operation. Five days later he died.

Back at his New York office, a distressed and disillusioned Vinci Clodumar
received a letter from Powell. "I very much appreciate president Dowiyogo's
efforts during his final trip," the Secretary of State wrote, "including ... his
courageous steps to co-operate ... to abolish Nauru's offshore banking sector.
Our thoughts and prayers are with you and the people of Nauru."

The Nauru delegation returned home without its president and without the
written promise of aid that Clodumar had urged.

By the time Vinci Clodumar wrote his March 19 letter -- to incumbent
President Gioura -- he appeared to have lost faith that the US would hold up its
end of the Nauru solution. He urged Gioura not to let cabinet ratify the Article
98 agreement "until noticeable progress is seen in the aid package that is
currently undergoing due process".

Last week -- on March 27 -- Nauru's parliament passed legislation outlawing
shell banks and foreshadowing tougher anti-money laundering laws. The US State
Department responded by "welcoming" an action that will remove "a significant
vulnerability to exploitation of Nauru ... by terrorists".

And what of the promises of extra aid? Speaking from New York this week,
Vinci Clodumar said the US Government had still made no offers of aid to Nauru.

The State Department is even more blunt. "The US is not currently developing
a financial assistance package for Nauru," a spokesman said. The US continues to
deny it made any promise of financial assistance to Nauru despite overwhelming
evidence to the contrary, including the claims of Nauru's political and
diplomatic leaders.

"We were disappointed," Kinza Clodumar says. 'I don't think our parliament
was happy about giving away so much. We came back with no piece of paper, only
promises."

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