Geoffrey Barker – A wizened brown man with black teeth squatted in the dusty Balibo roadside with eight 5-litre plastic jerry cans of kerosene he had lugged 8 kilometres up steep jungle hills from the smugglers' market on the border between East Timor and Indonesian West Timor.

In hot sunshine, metres from the wrecked house where five Australian-based journalists were murdered by Indonesian troops in 1975, he was waiting for Augusto, the man with the truck, who would pour the cans' contents into 200-litre drums and sell them in Dili.

Black-Teeth had paid 8,000 rupiah ($1.40) for each 5 litres; Augusto would buy them for Rp15,000. Four days each week, Black-Teeth and hundreds of other villagers haul their 40-litre fuel loads up to Balibo slung on bamboo poles across their skinny shoulders and wait for the Augustos and their trucks.

It's a living. It's the living in this isolated and still dangerous border area where 1,000 Australian troops from 4RAR battalion group commanded by Lieutenant-Colonel Jeff Sengelman remain on full operational alert against militia groups seeking to infiltrate from Indonesian West Timor.

The fuel smugglers complicate the Australian operations. Armed militia members visit the border markets and extort a percentage to fund their continuing activities. They also seek to infiltrate East Timor under cover of the smugglers and returning refugees in the hope of destabilising the new country.

So Sengelman and his troops find themselves in a catch-22. "We are here to protect the East Timorese," he says. "We have to work with the people to ensure their security, but any attack on the illegal cross-border trade is seen by the people as an attack on their livelihood. "We need to find strategies that do not attack them."

Ironically, a massive increase in cross-border smuggling was caused by the United Nations Transitional Authority itself. Its decision to impose a national 10 per cent consumption tax meant that smuggling fuel from Indonesian West Timor, where it is subsidised by Jakarta, became an irresistible proposition for East Timorese villagers close to the border.

With few customs posts along the mountainous 150km border of the 1,138squarekilometre Australian area of operations, it is easy for villagers to avoid taxes by tramping over jungle footpaths with their loads to make fast profits. The Australians have seen up to 400 villagers, including children, marching ant-like up steep hills with their jerry cans.

It is a trade of indeterminable scale, but only part of wider smuggling operations in fuel, cigarettes and foodstuffs taking place between Indonesia and East Timor. Rumours abound that corrupt East Timorese political leaders in Dili are deeply involved in the trade, but there seems no clear evidence to link any party or politician to it.

Indonesian military authorities in West Timor have no incentive to discourage the cross-border trade: they are skimming off their own percentage on the West Timor side to supplement their poor salaries and are thus also benefiting from Jakarta's subsidies and Dili's taxes.

Sengelman is philosophical about the trade. He is neither a customs collector nor a policeman, he says, but adds cautiously: "It does not make our jobs easier, trying to implement strategies that do not appear to be achievable ... Unless it involves security issues, it is not a soldier's problem."

His problem is that the smuggling frequently intersects with security problems in the area, including at Junction Point A, where armed Australian and Indonesian troops face each other in watchtowers across 419m of no-man's-land called the tactical control line, 12km from Balibo. Junction Point A is a major crossing point for refugees returning from West Timor.

Three times this year – on May 29 and twice this month – the Australian troops have been involved in significant border incidents. On May 29, three people were killed and about a dozen injured when grenades were thrown by suspected militia fighters at a market in the village of Mabusa. Indonesian troops rushed to the area and were ordered to leave by United Nations military observers when an Australian force arrived.

For Sengelman, the incident demonstrated that the militias used the markets, mingling with traders operating within the tactical control line.

On June 12, a key militia figure handed himself in to UN civilian police after crossing the border with a group of 230 returning refugees. Interrogated by Australian forces, the man revealed that other militia figures were also part of the group. The Australians mounted an operation involving 100 infantrymen supported by armoured vehicles and helicopters to sweep villages and round up other militia figures.

In all, 34 people claimed to be ex-militia and the Australians handed six of them over to the civilian police for further investigation. It was the first time so many militia members had handed themselves in, persuading Sengelman of the need to remain engaged with, and talking to, villagers about security issues.

On June 14 to 16, the lead scout of an Australian patrol challenged five armed men in heavy country. One of the men started to fire on the Australian patrol and the patrol counter-attacked, pursuing the men through 40m of jungle. The men moved back towards the Australian position, firing shots, before disappearing into West Timor.

Later, Indonesian forces told the Australians that they had captured five unarmed men who claimed they had been smuggling sandalwood. Sengelman described this encounter as "one of the most significant events to date". "It shows that groups with weapons and intent on killing are still trying to cross the tactical control line," he said.

None of these incidents has deterred the cross-border trade. If anything, it might have helped to lift prices. According to Australian Army Captain Toby Horton, prices rose after the May 29 grenade attack, with five litres of kerosene rising from Rp3,125 to Rp9,000 and a similar sharp increase in the profit from a truckload of 10 200-litre drums.

A former SAS commando with a Master's degree in international relations, Sengelman launched an operation code-named Albatross this month with the aim of denying militias the use of cross-border trade as a cover for moving into and out of the Australian area of operations, but without denying the villagers their freedom to engage in the trade.

The operation involved aggressive patrols, a public information campaign, and searching and physically monitoring trade locations. Sengelman is adamant that he does not want to confiscate goods from villagers. "I can't prosecute security if I take away the trade," he says.

But what would happen if the UN tax collectors and civil police mounted their own major operation to collect taxes or to stop smuggling? Sengelman says such action would undermine him, but adds: "I take the lack of UN interference with my approach as tacit endorsement."

Down at the Balibo market, the villagers appear to appreciate the attitude of Sengelman's men who maintain a relaxed if pervasive presence, repeatedly explaining that there are "no problems" – a universally understood formula – when they seek information about the trade.

Villagers seem pleased when the Australian troops arrive to look at their favourite gambling pastime: cock-fighting. A smiling village boy, carrying his victorious rooster in one hand, waves the bloody, white-feathered carcass of its vanquished opponent at the Australians as they stroll by. It seems a sign of approving recognition.

And so from his headquarters in an old Portuguese fort, Sengelman's soldiers are surrounded by the ghastly memorials at the sun-drenched place of death that is Balibo – the death house of the Balibo Five, the nearby bullet-pocked kissing house where militias in 1999 forced Timorese to lean forward to kiss a wall before shooting them in the back of the head, and the big old hanging tree where Timorese were executed and left on display.

Inside the kissing house, behind a black drape, an altar has been built. On it are six small black coffin-shaped boxes, including one that is infant-sized. The boxes hold the bones of some East Timorese slaughtered on August 30, 1999. There are flower petals and candle wax on the altar and on the floor. On each coffin, for the ghosts of each of the slain, mourners have left a cigarette.

And outside, the bright hot sun shines on a large Indonesian statue. It is the statue of a man with raised arms from which hang broken ropes. It purportedly represents an East Timorese who has broken the shackles of Portugal by becoming part of Indonesia. The villagers are too busy smuggling fuel or betting on cock-fights to stop and laugh at it.