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Compere: Tony Jones Reporter: Nick Grimm

TONY JONES: Back to the allegations that Singapore has spied on Australia for over 20 years, even to the extent of recruiting a mole inside one of our most sensitive communications facilities.

This is an extremely delicate moment for such allegations to be made, virtually on the eve of a decision by the Foreign Investment Review Board on whether SingTel should be allowed to take over Optus.

The deadline for that decision is 20 September.

The Singapore-owned telco has been at the heart of allegations at home that it's been used to spy on its own people and its links to the ruling oligarchy and the military in the island state are profound.

So, can we secure our own telephones if SingTel takes over Optus?

And what of the secret defence communications equipment packed into the Optus satellite?

How can its security be guaranteed?

The second part of Nick Grimm's report on the takeover bid begins with the reaction to last night's story.

PROF ROSS BABBAGE, STRATEGY INTERNATIONAL: There has clearly been a number of quite aggressive intelligence gathering operations conducted in Australia.

WARREN REED, FORMER ASIS OFFICER: They're getting some of our most closely guarded secrets and they're being sold by Australian traitors.

NICK GRIMM: Singaporean warships off the coast of Darwin today, after engaging in mock war games in Australian waters.

The 5-nation Exercise Kakadu is just one manifestation of the friendly defence relations Australia has with its Asian neighbours.

But as Lateline revealed last night, beneath a veneer of cordial relations it appears Singapore has been engaging in activities of a far less friendly nature -- espionage.

PROF ROSS BABBAGE: It's the sort of thing that close allies do not do in each other's countries.

NICK GRIMM: It was a diplomatic bombshell that today had the Government and Opposition ducking the issue.

JOHN HOWARD, PRIME MINISTER: Well, I don't accept the premise of the question.

Thank you.

KIM BEAZLEY, OPPOSITION LEADER: We know a deal about it but it's not a sensible thing to commentate on it.

REPORTER: It extrapolates out though to concern that if Singapore interests get to buy Optus then they get control of one of our main defence satellites?

KIM BEAZLEY: All issues including national security issues relating to that are before the Treasurer and the Defence Minister, they are the ones that are capable of making, in terms of the information presented to them, a sensible judgment about those concerns and I have faith that they will be well advised.

NICK GRIMM: The revelations come at a sensitive time, with Singapore seeking Foreign Investment Board approval for a $17 billion takeover of Australia's second largest telecommunications company, Cable and Wireless Optus.

It was left to the Democrats to pursue the matter in parliament today.

SENATOR VICKI BOURNE, DEMOCRATS: My question is addressed to the Minister representing the Treasure, Senator Kemp, and I ask will last night's serious allegations on Lateline be scrutinised before any decision is made?

SENATOR ROD KEMP, ASSISTANT TREASURER: Senator, let me assure you that these matters are looked at on a case by case basis and no proposal would be approved madam president if it was considered to be contrary to the national interest of Australia.

NICK GRIMM: The most serious revelation surrounds the claim that Singapore had breached Australia's most secret military intelligence organisation, the DSD listening station near Toowoomba in Queensland.

Australia's leading military intelligence expert, Professor Des Ball, told Lateline an army linguistics officer was arrested 20 years ago, but the charges were later dropped.

PROF DES BALL, STRATEGIC & DEFENCE STUDIES CENTRE: They still believed that someone was working for the Singaporeans but it was not the individual who had been charged in 1981.

NICK GRIMM: They essentially had the wrong man?

PROF DES BALL: Yes, there had been suspicions over the past decade that in so far as some other person had been working for the Singaporeans, that a fall guy had in fact been set up to provide a cover for the operation.

NICK GRIMM: It appears the real culprit was never caught.

Senior figures in defence circles say that's hardly the kind of track record wanted in a foreign state that could soon own Australia's main defence satellite.

The Optus C1 satellite is the channel through which most of Australia's military secrets are sent.

But there's concern too, that the Singapore-government controlled telco, SingTel, could also use Optus to spy on domestic communications.

PROF LILLY RAHIM, EX-PATRIAT SINGAPOREAN: SingTel does have an unsavoury record for colluding with other arms of the state for closely monitoring citizens.

NICK GRIMM: Professor Lilly Rahim has lived and worked in Australia for 15 years.

But as a critic of the Singapore government herself, she admits to feeling intimidated.

So, as a Singaporean living in Australia yourself, would you feel uneasy about your privacy if SingTel owned Optus.

PROF LILLY RAHIM: There is that element of fear.

Many Singaporeans in Australia are uneasy about this possible takeover.

There are quite a few Singaporeans who have left Singapore because they have been politically harassed.

And they believe that it will carry on its past activities in Australia.

NICK GRIMM: Meanwhile, the Optus deal is not just causing political waves here in Australia.

JAMES GOMEZ, SINGAPORE THINK CENTRE: We are also watching to see how this might affect alternative policies agenda in Singapore.

NICK GRIMM: SingTel could not be closer to Singapore's ruling elite.

Its chief executive is Brigadier General Lee, the son of Singapore patriarch Lee Kwan Yew and the brother of the present deputy prime minister.

Singaporean political scientist, James Gomez, says the controversy surrounding the Optus bid could help force political change in his home.

Nick Grimm, Lateline.