Jana Wendt: Now to our cover story, and a rare glimpse into the shadowy world of espionage. The past two years of terrorism in this region have brought the intelligence agencies of Australia and Indonesia closer than ever before.

That's led to some extraordinary admissions by Indonesia's former chief spymaster. He reveals this morning that for years Indonesia has been spying on Australia, with great success. This country's military and political leaders and civilians have been bugged, and Jakarta has recruited Australians to spy on their own, including, we're now told, a sleeper in Australia's Secret Intelligence Service, ASIS.

Sunday's Sarah Ferguson has just returned from Jakarta, where she spoke with the country's outgoing spy chief, and three of Indonesia's Presidents, past and present.

Sarah Ferguson: It's the last day in the job for Indonesia's spymaster. A final trundle around the sprawling compound of Indonesia's most secret intelligence agency. His staff and their family line the path to say goodbye to 'Hendro' as they call him ... General Mahmud Hendropriyono. Behind the genial exterior though he's a man who knows more than most about how Indonesia's spies targeted Australia.

Sarah Ferguson: Who were you bugging on the Australian side? What sort of targets, military political civilian?

General Mahmud Hendropriyono: In the Timor case military and – both. Civilian as well.

Sarah Ferguson: And political too?

General Hendropriyono: Pardon me?

Sarah Ferguson: Political as well?

General Hendropriyono: Oh, yes, yes. Political as well.

Sarah Ferguson: Does that mean politicians?

General Hendropriyono: Politicians, yes.

Sarah Ferguson: Today we'll also hear from three Indonesian presidents on the legacy of suspicion that drove that intelligence effort.

Abdurrahman Wahid: Australia meddles into our affairs.

Sarah Ferguson: It's rare for cameras to be allowed anywhere near the Badan Intelijen Negara, the powerful national intelligence agency known as the "BIN". This is its secret compound, complete with parklands and herd of deer, a gift to General Hendropriyono from President Megawati. Sunday was given unprecedented insights into an intelligence system that may have been more successful in Australia than has ever been admitted.

General Hendropriyono: You know, we found many evidence that our embassies abroad are tapped, the telephone and as well as here – here also we did the same thing, we intercept – we want to know what is really discussed about us.

Sarah Ferguson: So presumably that included tapping the Australian Embassy?

General Hendropriyono: Not only Australia, but we tapped all – we inter-tap – that's quite the Government thing, you know, that this is – we can say that this is a public secret. You know, secret, but the whole public knows. This is quite common intelligence activity.

Sarah Ferguson: And do you believe your embassy in Canberra also was tapped by the Australian secret service?

General Hendropriyono: She is silly if she doesn't do that, you know? Not necessarily embassies, but whatever institutions that's located in other countries should be followed. Should be watched and observed well.

Sarah Ferguson: Hendropriyono has run the BIN for three years. Before that he held key roles in Indonesia's special forces, and military intelligence.

Did you ever manage to recruit anybody – any Australian person to work for your – for your side, as it was then?

General Hendropriyono: Mm. It's a very good question, but it's very difficult to answer. Actually every country we – we do the same. We should do that, but this – most of the time fail. You know, it's very difficult. The best way to do is to penetrate instead of infiltrate. But to penetrate is also not an easy way to do.

Sarah Ferguson: Did you ever succeed in Australia to – to penetrate? To turn someone to work for your side?

General Hendropriyono: Oh, almost, but not yet.

Sarah Ferguson: In the highly nuanced world of intelligence, a simple yes can be the hardest word.

Did you actually manage to get someone working for you? Someone in Australia?

General Hendropriyono: No, not by myself.

Sarah Ferguson: Not yourself. But what about Indonesia. Did they succeed in recruiting Australians to work for ...

General Hendropriyono: No. No.

Sarah Ferguson: No. Nearly? Nearly, you said.

General Hendropriyono: No. Nearly, because of every time when the political conditions they become worse, then espionage be very fertile in this case. If – say Indonesia has a bad relation with any country A or X country, then we will do that.

Sarah Ferguson: We're invited to share Hendropriyono's last supper in office. It's fried eels and chilli chicken served on dinnerware inscribed with his own design ... one copied from the insignia of America's CIA. Hendropriyono admits to spying on Australia. But he insists all that's ended with Jakarta and Canberra now facing a common terrorist enemy.

General Hendropriyono: Now we have to put aside the border – administrative border – because now we are encountering in this era of globalisation the same threat.

Sarah Ferguson: So you...

General Hendropriyono: The same challenge.

Sarah Ferguson: You no longer need to spy on Australia?

General Hendropriyono: Mm.

Sarah Ferguson: But you used to.

General Hendropriyono: Used to, yes. No, no.

Sarah Ferguson: With terror groups now directly targeting Australian in Indonesia the intelligence relationship has never been more important. Immediately after the bombing of the Australian Embassy two months ago, Hendropriyono's counterparts Dennis Richardson, head of the domestic spy agency, ASIO, and David Irvine, head of Australia's foreign spy recruiters, ASIS, flew straight to Jakarta.

General Hendropriyono: We discuss all the things aim to predict what is going to happen again, and this is of course very classified thing I cannot mention. But we have some prediction that we have to be alert. We have to watch this closely.

Sarah Ferguson: In relation to Australia?

General Hendropriyono: Yes. You understand that we have a common threat in this case. It can happen in Indonesia. It can also happen in Australia as well.

Sarah Ferguson: With the bombers still at large the threat to Australian interests remains high. Does it mean that very high profile Australian businesses connected very clearly with Australia could be vulnerable?

General Hendropriyono: Yes, of course. Yes.

Sarah Ferguson: Now that Hendropriyono is going into civilian life, the key is to keep the momentum of co-operation going. But there are serious challenges.

Abdurrahman Wahid: But the problem is Australia she thinks from her own perspective, their own needs, for example this – about terrorism. You know, by providing, you see, what we call common efforts, this or that means the Australians would like to interfere in our affairs.

Sarah Ferguson: Though President Wahid was forced out of office in 2001, he remains a powerful figure. He's one of the leaders of the Nahdlatul Ulama, Indonesia's largest Islamic organisation with as many as 40 million members. Today he sounds an ominous warning, predicting a nationalist backlash against the growing Australian security presence in Indonesia.

Do you believe that sending people from both our intelligence agencies and our police to operate inside Indonesia is wrong?

Abdurrahman Wahid: Wrong. Why, because that makes our people inflamed. Because, you know, politics is impressions.

Sarah Ferguson: Given that terrorism is an international problem, doesn't it require an international response, not a nationalist one?

Abdurrahman Wahid: Well, we have to let times to show whether you are right or they are wrong.

Sarah Ferguson: But in the meantime the problem for Australia is that the attacks in Indonesia include Australia. The Embassy itself was attacked...

Abdurrahman Wahid: Yes. That's – I know this. The question is that why they attack the Australian Embassy? That's important.

Sarah Ferguson: And what do you think?

Abdurrahman Wahid: Yeah, because Australia meddles in our affairs.

Sarah Ferguson: Former President Megawati Sukarnoputri had an equally ambivalent attitude towards Australia. Famous for rarely speaking to the media, she gave Sunday her only interview after being voted out of office in September.

Megawati Sukarnoputri: [Subtitled.] Frankly, it was my experience as President that there was a lack of harmony in the relationship between Australia and Indonesia.

Sarah Ferguson: Why was there less harmony between the two countries? What was the cause of that?

Megawati Sukarnoputri: [Subtitled.] I really don't think we communicated openly. If we are going to be more open, then, of course, we can't be so suspicious of each other.

Sarah Ferguson: Megawati boycotted the inauguration of her successor Bambang Yudhoyono. While in a clear sign of Australia's hopes of a better relationship with Indonesia, John Howard flew to Jakarta for the ceremony.

President Susilo Bambang Yudhoyono: I know that there is economic cooperation, security dialogue and other things that we have to improve in years to come.

Sarah Ferguson: Yudhoyono committed himself to the fight against terrorism.

Yudhoyono: We will intensify our operations in detecting terrorism by improving our capacity – intelligence capacity, police capacity...

Sarah Ferguson: Unlike his predecessors, he says he'll take action against the terrorist organisation Jemaah Islamiyah.

Yudhoyono: And if I got strong legal evidence that Jemaah Islamiyah does exist in Indonesia, I will of course ban that organisation.

Sarah Ferguson: But the controversial re-trial of the organisation's leader Abu Bakar Bashir, which began the day after Yudhoyono's inauguration, demonstrated how difficult that may be. In a telling moment with an advisor Yudhoyono revealed the sensitivities of dealing with two different audiences, the Australian and the domestic.

Yudhoyono: [Subtitled.] But the recent trial couldn't prove that Abu Bakar Bashir wasn't part of Jemaah Islamiyah.

And she pressed me on this point. Is this sensitive?

Presidential adviser: [Subtitled.] Maybe. It might be better if you didn't admit that Jemaah Islamiyah exists.

Yudhoyono: [Subtitled.] But domestically it's really sensitive?

Presidential adviser: [Subtitled.] Yes, you'd better just give her the background.

Sarah Ferguson: Is there anything you need to add, or...

Former president Wahid doesn't believe Yudhoyono can overcome those sensitivities to confront the forces of Islamic fundamentalism.

Abdurrahman Wahid: He has no courage – moral courage – to follow through his own thinking. He is a good man. But we need a strong man, not a good man, in the Government.

Sarah Ferguson: What about a strong, good man?

Abdurrahman Wahid: Yeah. Yeah, yeah, yeah. But he's a weak, good man.

Sarah Ferguson: If Australia and Indonesia are to achieve a closer co-operation, it means both countries will have to put aside the legacy of East Timor.

Megawati Sukarnoputri: [Subtitled.] At the time I was leader of the party and I had a very strong reaction. You can't just erase an event like that. We have to go through a process.

Alan Behm: Within the Indonesian military there was a strong sense of disappointment, betrayal would have been felt by some.

Sarah Ferguson: A key figure in Australia's military establishment, Alan Behm also has close ties with the Indonesian military.

Alan Behm: I think that across the board, many felt we had been duplicitous in developing a close relationship and working it very hard and at the same time being able to plan for a multi-national peace-keeping force on what many of them would have regarded as sacred ground for Indonesia.

Sarah Ferguson: Hendropriyono was one of those people. He had trained in Australia, had extensive contacts with the military here. And he wanted East Timor to remain part of Indonesia.

Were you angry yourself with what Australia was doing at that time?

General Hendropriyono: You ask me personally?

Sarah Ferguson: And your circle. Your immediate circle.

General Hendropriyono: My circle too. Yes, actually. Yes. We were upset.

Sarah Ferguson: Both sides stepped up their intelligence activity.

General Hendropriyono: The Australian intelligence tapped all conversations with Indonesia armed forces officers but also civilians. Then we make some counter tap, you know counter bugging – we also bugged them, and they make the same [indistinct] to protect.

Sarah Ferguson: You say you were bugging the Indonesian officers, but what about against Australia at that time?

General Hendropriyono: Yeah, the same. We did the same.

Sarah Ferguson: And who were you bugging at that time on the Australian side?

General Hendropriyono: That one I cannot mention. I am very sorry. We don't do that.

Sarah Ferguson: No.

General Hendropriyono: We no longer do.

Sarah Ferguson: But what sorts of – what sorts of targets? Military? Civilian? Political?

General Hendropriyono: In the Timor case – in Timor's case, military, and – both. Civilian as well. You know.

Sarah Ferguson: And political too?

General Hendropriyono: Pardon me?

Sarah Ferguson: Political as well?

General Hendropriyono: Oh, yes, yes. Political too.

Sarah Ferguson: Does that mean politicians?

General Hendropriyono: Politician, yes. Yes.

Sarah Ferguson: You managed to bug Australian politicians?

General Hendropriyono: I can't – I will not answer that. I think it's quite common thing in a country which are – who are in hostilities. You know, we will always listen and see actually what's the case in our opponent.

Alan Behm: They certainly would have attempted to step up their intelligence effort in Australia at that time. They certainly would have wanted to monitor what sorts of forces Australia was deploying to East Timor. What the capabilities were.

Sarah Ferguson: Intelligence was critical. Nobody in Australia knew if the Indonesia military would confront Australian forces in East Timor. As a former officer for ASIS, Warren Reed also understands this intelligence work from the inside. His job was recruiting and running Indonesian spies. He knows the sorts of people the Indonesians would have targeted here.

Warren Reed: Key officials in the decision making process in Canberra. And then when everything went awry with the militias how we were reading the situation, what sort of intelligence we were pulling out of Indonesia, electronically or in "humint" terms.

Sarah Ferguson: How substantial an operation was it in that very difficult time leading up to East Timor. Was it a big operation?

General Hendropriyono: Oh yes. We should – we should give the best information to the Government for the Government decide political decision.

Sarah Ferguson: Well, did you discover...

General Hendropriyono: Yes, of course.

Sarah Ferguson: Much information?

General Hendropriyono: Oh, yes, yes, yes. Of course. Yes.

Sarah Ferguson: So you said before that...

General Hendropriyono: Average is okay. You know, we have many things I also could not get. We couldn't make it. But most of them is – are successful.

Sarah Ferguson: Today for the first time Reed claims the Indonesians recruited spies inside his own organisation ASIS.

Warren Reed: With penetration deep into the intelligence system here they would have been pulling plum product out of Canberra.

Sarah Ferguson: You say penetration deep in the system. What do you actually mean by that?

Warren Reed: I think they've been very successful over the years, meaning decades. And this goes into the heart of our intelligence system, and I mean, including, and I specifically add this, the Australian Secret Intelligence Service, for which I worked for 10 years.

Sarah Ferguson: You're saying the Indonesians penetrated ASIS?

Warren Reed: Yes.

Sarah Ferguson: Do you know that for sure, or is that just part of community rumour?

Warren Reed: I wouldn't say it otherwise. I wouldn't say it otherwise. And it's known in Canberra, too, and it has not been properly addressed.

General Hendropriyono: I think this is universal lessons. This is universal knowledge. That we can recruit agents in every countries. In Cold War era we used to do that. We sent people to penetrate, to infiltrate, and we also tried to penetrate the target countries. But now we don't need that.

Sarah Ferguson: No.

Warren Reed is sure the spy network is operating today.

Are there still Australians working for the Indonesians?

Warren Reed: Now, I would believe the answer to that would have to be absolutely.

Sarah Ferguson: It's a huge accusation you're making. Can you actually support it?

Warren Reed: Yes, but I won't talk about that now. If there were a properly constituted Royal Commission, and for the first time – and I emphasise for the first time – without a crony running it. And one with broad, almost limitless terms of reference, that allow them to look at anything that needs to be looked at, including criminal activity, then myself and many others would come forward and talk about what we know.

Sarah Ferguson: General Hendropriyono takes his final bow. He may be leaving the agency. But not the secret world of intelligence, and his close contacts with Australia's top spymasters, like ASIO chief, Dennis Richardson.

General Hendropriyono: We've become very close to each other. We can easily call each other. You know, and also we can send message.

Sarah Ferguson: You text each other?

General Hendropriyono: Yes. We text each other.

Sarah Ferguson: And he is always hinting at further possibilities. His account of which side came out on top in the past.

General Hendropriyono: It is hard to judge, because of we know maybe about Australia. We don't know how far Australia knows about us.

Jana Wendt: Stories of infiltration and penetration. Sarah Ferguson reporting there.