In February 1997 Australian intelligence agencies picked up the first clear indications that the Papua New Guinea (PNG) Government was recruiting mercenary fighters to help it recapture the island of Bougainville. In Bougainville's dense jungles, an intractable rebellion had been under way for nearly a decade, forcing the closure of the island's copper mine and causing extensive death and suffering. Intelligence reports confirmed that the PNG Government had signed a $36 million contract with the British company Sandline International to supply arms, training and former South African fighters to destroy the Bougainville Revolutionary Army and reopen the copper mine. News of the Sandline contract immediately became a foreign policy issue of major importance to Australia. Papua New Guinea is Australia's closest neighbour, the recipient of $300 million annually in civil aid and $12 million in defence aid. It is an important element in Australia's security planning. Up to 10,000 Australian citizens were thought to be in PNG.

The initial fragmentary intelligence reports had already been discussed by the Strategic Policy Coordination Group, the small group of senior officials from the departments of Defence, Foreign Affairs and Trade (DFAT) and Prime Minister and Cabinet (PM&C) charged with the day-to-day coordination of strategic policy within the public service.