Inside the US battle with China over a Pacific island paradise

The brilliant blue waters, thick foliage and bucolic atmosphere on this seemingly idyllic archipelago deep in the Pacific Ocean belie the key role it now plays in a titanic geopolitical struggle.

Palau, where brutal World War Two clashes once unfolded, is again on the frontline as China and the United States and its allies prepare their forces in an intensifying contest for control over the Asia-Pacific region.

The democratic island nation of just 17,000 people hosts American-controlled airstrips and soon-to-be-completed radar installations that the US military describes as “critical” to monitoring vast swathes of water and airspace. It is also a key piece of the Second Island Chain, a string of strategically located islets that America is fortifying in an effort to deny China access to the Western Pacific.

Now, that outsized strategic value has made Palau the target of a concerted influence campaign by individuals with ties to the Chinese government, according to intelligence reports, police files, court records and land filings reviewed by Reuters, as well as interviews with more than 20 diplomats and local law enforcement officials.

At the same time, the once-sleepy island nation has been transformed into a hub of illegal activity, rife with drug smuggling, online gambling operations, money laundering and prostitution allegedly linked to Chinese individuals and syndicates. This activity has brought with it a gruesome killing – including the transporting of a corpse in a suitcase – and a well-orchestrated kidnapping whose target is believed to be in a Chinese prison after having been forcibly smuggled out of Palau by boat.

Some of these Chinese individuals have cultivated close ties to senior political figures on Palau, making “donations” to some of them, according to two intelligence reports distributed to Palauan officials by the local US embassy. These individuals have also allegedly facilitated meetings between Chinese officials and Palauan politicians. In one instance, a Chinese official associated with the United Front Work Department, the body that oversees Beijing’s foreign influence activities, met with Palau’s current vice president, according to one of the US intelligence reports. The vice president, Raynold Oilouch, didn’t respond to questions about the alleged meeting.

An effort also appears to be underway to block the expansion of US military installations on Palau, which include radar stations and airstrips built to service military aircraft. A review of land records by Reuters reveals that Chinese businesspeople and Chinese-linked businesses have leased land overlooking or adjacent to some of these American military facilities.

Joel Ehrendreich, the US ambassador to Palau, says China is using the same tactics in Palau that it has deployed elsewhere in the Pacific. Sitting in an office packed with baseball memorabilia and Palauan carvings of dugongs, a chubby sea mammal, he warns that Beijing is using organised crime to infiltrate Palau, buy the backing of political leaders and establish a foothold on the island.

“We’ve seen the playbook over and over again throughout the region, and it’s been very effective,” Ehrendreich said in an interview. “Get in with predatory investment, corrupt officials through elite capture, and try to destabilise the society through drug and human trafficking and other crime. And it’s easy to do when you go one by one through these little countries that you can overwhelm.”

Claims that China is undermining Palau’s stability or interfering in its elections “are far-fetched, slanderous, and completely fabricated nonsense,” a spokesperson for China’s foreign ministry said in response to questions from Reuters.

“Who is building military bases in Palau? Who wants to turn Palau into a strategic military outpost?” the spokesperson added. “We urge the US side to stop smearing and slandering China … and stop provoking trouble in the region.”

The island, which is geographically closer to China than any other Pacific Island nation, is also one of the few countries that still formally recognize Taiwan. China has spent decades successfully persuading countries not to recognize democratically governed Taiwan, which Beijing views as part of China.

Asked about Palau’s relationship with Taipei, the Chinese foreign ministry spokesperson urged countries that “still maintain so-called ‘diplomatic relations’ with the Taiwan region not to be blindly arrogant and stubborn.”

Surangel Whipps Jr, Palau’s president, didn’t respond to questions for this story. Speaking at a think tank in Sydney earlier this month, he addressed the issue of crime on the island: “Drugs, human trafficking, all of these kinds of activities have a way of undermining the political structure,” he said. “Online scamming or gaming that happens, they end up influencing politicians and things that go on in Palau.”

POLITICAL INFLUENCE

A tangled web of Chinese influence efforts and illicit activity emerges from the US intelligence reports and other documents reviewed by Reuters, and from interviews with local law enforcement officials.

Take Hokkons Baules, the president of the Palauan Senate, who has been one of the island’s most vociferous advocates for China. Under his leadership, the senate has passed resolutions criticising US military activity in Palau, while he has personally advocated for expanded ties with China.

“We want to go with China, because we need a lot of help with infrastructure,” Baules told Reuters. He added that Palau should drop its recognition of Taiwan.

At the same time, Baules has allegedly built relationships with Chinese investors, including a man named Sun Maojin, who runs a technology company that lists state-controlled research centres and universities in China as partners on its website. In November 2023, Sun flew to the island with several associates and $119,000 in cash, according to flight records, photos reviewed by Reuters, and three Palauan law enforcement officials. When Sun was questioned by customs officials for failing to disclose the money, Baules called one customs officer to ask for his release, according to the officials.

“These guys are my friends,” Baules allegedly said, and added that they were in Palau to lease land. The officials said Sun was released after paying a fine. Palau’s Land Court has no records of a transaction between Baules and Sun.

Baules said he doesn’t recall the incident. Sun didn’t respond to questions sent to his company.

Baules pleaded guilty to heroin trafficking in 1989. Corporate records reviewed by Reuters show that his family operates a local business called Fuji Restaurant, which Palauan authorities have linked to Chinese criminal activity. The family rented out space in the building between 2018 and 2020 to Chinese brothels masquerading as massage parlors, according to legal filings related to another case that were submitted by Palau’s anti-corruption office.

None of the Baules family face charges in that case. Baules insisted that the brothels were massage parlours. “It’s not my business, it’s their business,” he said of the Chinese businesspeople his family rented space to.

The address of Fuji Restaurant was also on a package of methamphetamine that was intercepted at Manila airport last year, according to local press reports in the Philippines. The reports stated that the intended recipient was a Chinese man in Palau. Based on an estimate from local law enforcement officials, the stash had a street value of at least $83,000. No charges were filed in the case.

Baules dismissed the allegations, telling Reuters he was the target of a smear campaign aimed at ruining his name.

The senate leader also has ties to prominent Chinese figures on the island, including Hunter Tian, the president of Palau’s Overseas Chinese Association, which promotes the interests of Chinese residents on the island. Baules has leased land to Tian for a hotel Tian runs, land court records show.

In 2023, Tian participated in training courses in Beijing and Nanjing that were organised by the Chinese government for overseas Chinese leaders, according to promotional material from three pro-Beijing Chinese diaspora groups. The course in Beijing was run by a group under the authority of the United Front Work Department, the body that oversees China’s foreign influence efforts, according to the material. The course in Nanjing was attended by United Front officials.

Tian didn’t reply to questions sent to a lawyer who has done legal work for him. Baules described Tian as “a good guy.” The authorities “have not filed any case against him,” Baules said.

CAMPAIGN FUNDING

The US intelligence reports, one from last November and the other undated, also assert that Chinese businesspeople gave tens of thousands of dollars in cash to politicians ahead of elections last year in Palau. According to one of the reports, Wang Yubin, a Chinese citizen who is secretary of Palau’s Overseas Chinese Association, agreed to donate $20,000 to Thomas Remengesau Jr, a former president seeking another term, and donated $10,000 to Oilouch, who was running to be vice president. Remengesau lost his race. Oilouch won and is now Palau’s vice president.

Wang didn’t respond to questions for this story.

The intelligence reports describe the donations as “illegal” or “illicit” campaign funding. Tamara Hutzler, the country's anti-corruption prosecutor, said political donations by foreign nationals are illegal in Palau.

“The only evidence my office has received is via anonymous sources,” she said. “Everyone knows foreigners give money, but without evidence our hands are tied.”

“The corruption is just pervasive,” added Hutzler. It is tough to combat, she said, in part because law enforcement lacked resources.

Oilouch told Reuters he had “never received a penny” from a foreigner for his political campaigns. As an attorney, he said, he had represented foreign clients, but as vice-president he was “actively removing” himself from all cases.

Remengesau said accusations he had received donations from Chinese businesspeople were “ridiculous.” People in Palau, he said, “know that I don’t mix government with business.”

The family of at least one top politician has benefited from American investment in Palau. A company registered under the name of the father of Surangel Whipps Jr, Palau’s president, has been awarded at least 41 Department of Defence contracts worth approximately $6 million, largely related to construction services, according to a Reuters review of a federal database. This makes the company one of the largest commercial Palauan beneficiaries of US contracts.

Remengesau, who is Whipps’ brother-in-law and ran against him for the presidency last year, said “conflict of interest” situations should be avoided.

Whipps didn’t respond to questions about the contracts. Ehrendreich, the US ambassador, said that “given the small size of Palau and the significant role of the Whipps family's businesses in this country, contracting and procurement with them is inevitable.”

AMERICAN INFLUENCE

Palau feels as if it has been transplanted from the United States, which administered the country’s 300 or so islets for half a century after capturing them from Japan in World War Two. The former colony won independence in 1994, but remains deeply tied to and dependent on the US Many locals speak with an American accent after having spent years working in the US– or the “mainland,” as many Palauans refer to it.

Palauans can work without a visa in the US due to a treaty called the Compact of Free Association. Similar agreements bind the island states of Micronesia and the Marshall Islands to the US Together, the compacts give Washington responsibility for defending these territories and funding large parts of their governments. In exchange, the US gets exclusive military access to vast swathes of the Pacific.

The connections to America are particularly resonant on Palau’s southern islands of Peleliu and Angaur. The two isles were sites of bloody World War Two battles in which more than 12,000 US soldiers were killed or wounded while trying to displace Japanese troops. Scattered through the jungle, the blackened and rusted remnants of Japanese tanks and fortifications can still be seen today.

Many of the 100 or so residents of Angaur have relatives serving in the American military. US law permits citizens of Palau and two other former colonies in the Pacific to enlist like Americans. In a nod to that relationship, residents have nicknamed their island “the United States of Angaur.”

In 2017, the US military announced plans to build radar facilities in Angaur and other Palauan islands. Later, it began redeveloping multiple airstrips. The facilities will allow the US to disperse its forces in anticipation of a strike by China on American strategic hubs like Guam, and to monitor air traffic in the region without tying up ships or aircraft to do so.

Soon, Angaur began attracting attention from Chinese entities. Multiple media outlets reported that in 2019, Wan Kuok Koi, a former leader of the powerful Chinese triad called 14K, visited Palau with the goal of leasing land on Angaur and opening a casino there.

Foreign nationals cannot purchase land in Palau, but they can lease it for decades-long periods.

In 2020, the US Treasury identified Wan, known as Broken Tooth, as a leader of the triad and sanctioned him for leading an entity engaged in “corruption.” The sanctions notice alleged that he was a member of the Chinese People’s Political Consultative Conference, a largely ceremonial advisory body of China’s parliament. A photo published in local media shows Broken Tooth meeting with Remengesau, who was president of Palau at the time.

Remengesau said he wasn’t aware of Broken Tooth’s identity during their meeting. “You don’t know who these people are, but you have to be polite and give them the time of day,” he said.

Broken Tooth’s efforts were stymied when Palauan officials learned he was a triad leader, according to Remengesau. The former triad boss didn’t respond to questions sent to a lawyer who has represented him in criminal cases.

'HUNDRED PERCENT BETRAYED'

Angaur residents interviewed this month said no Chinese nationals have succeeded in acquiring land there. “It would never happen,” said Erik Vereen, an Angaur legislator. “There’s no land to be leased.”

Court records, however, show that Chinese individuals have leased large swathes of communally owned land on Angaur.

Tian, the president of the Overseas Chinese Association, has acquired roughly 280,000 square meters of land on Angaur, including a large plot abutting the island’s airstrip. The US subsequently announced plans to develop a radar station next to the airstrip.

Another set of land registry documents show that an investor named Zhuang Cizhong leased a further 380,000 square meters of land near the airstrip. Zhuang acquired the land after the US announced its development plans.

Together, Tian and Zhuang’s holdings amount to about 8% of Angaur’s landmass. Neither appears to have developed the land. When told about the leases, Angaur legislator Vereen said he felt “a hundred percent betrayed.”

Reuters was unable to contact Zhuang.

Lease records and interviews with environmental regulators also reveal that a company connected to the Prince Group, a Chinese-Cambodian conglomerate, has acquired an islet near a new US coastal monitoring station in the Palauan region of Kayangel. Lease records and a visit to the site by Reuters revealed that another company connected to the Prince Group is also developing a piece of land near Palau’s airport, which the US uses for military exercises.

Corporate filings show that the local agent in Palau for one of these companies is Rose Wang. She is a former vice president of Palau’s Overseas Chinese Association, according to one of the US intelligence reports. In 2019, according to the association’s social media, Wang was among prominent diaspora Chinese representatives to attend celebrations in Beijing’s Great Hall of the People to celebrate the 70th anniversary of the founding of the People’s Republic of China.

Wang and the Prince Group didn’t respond to questions for this story.

Some of the companies tied to the Prince Group in Palau were first flagged in a recent report by Pacific Economics, an American consultancy that has studied foreign investment in Palau.

Ehrendreich, the US ambassador, said the leases were almost certainly strategic. “All around there are various plots of land that are now being leased to Chinese interests,” he said of Angaur. “I don’t think it’s any coincidence at all that it happens to be physically close to our projects.”

The land-lease tactic, he said, was “how they maybe are able to keep an eye on what we’re trying to do here.”

China’s foreign ministry didn't respond to specific questions about the land leases.

BODY IN A SUITCASE

Since 2019, hundreds of foreign nationals from China and Southeast Asia have travelled to Palau to work in online gambling and scam centres.

Despite regular busts by Palauan law enforcement, the centres have continued to thrive. At the same time, there has been a boom in methamphetamine trafficking and violent crime.

Late one evening in February 2023, a black Mazda pulled up in Koror, the main town, according to local media reports and a law enforcement official who described CCTV footage of the incident. Two men got out and seized a Chinese expatriate named Chen Liyan. They bundled Chen into their car and drove to a marina packed with private boats on the outskirts of town. They parked beside a fishing vessel, which later headed out to sea.

Palau’s government later learned that China had issued an arrest warrant for Chen, a local law enforcement official told Reuters. According to Chinese media reports, police accused Chen, a former Chinese village official, of overseeing organised criminal gangs. The reports said China had offered a bounty of roughly $68,000 for Chen. The official told Reuters that China had informed them Chen was now imprisoned in the Chinese province of Jiangxi.

Chen’s disappearance is still under investigation in Palau. His kidnapping is one of several recent incidents that have spooked locals.

In 2023, a Chinese man named Fang Ye disappeared from the American Pacific territory of Saipan, where prosecutors accused him of smuggling methamphetamine. Several months later, according to Palauan police files reviewed by Reuters, Fang surfaced in Palau, where he took an upstairs room at an apartment building in central Koror.

There, Fang met Li Peng, a Chinese boat captain and longtime Palauan resident. A tenant of the room below later told police that she heard noises “like a bowling ball rolling across the floor,” which continued for at least 40 minutes.

In CCTV footage from that evening reviewed by Reuters, three men – whom investigators identified as Fang and two associates – can be seen carrying a suitcase to a car. The next day, at least two of the men drove into the Palauan wilderness with the suitcase.

A local Palauan spotted the men and reported them to police – who later discovered the suitcase with boat captain Li’s dead body, which had been set on fire.

According to a written briefing prepared for Palau’s president, which Reuters reviewed, the killing was motivated by a dispute over a drug smuggling route between Saipan and Guam.

Fang was arrested and accepted a plea deal in which he did not contest a manslaughter charge. He has since been extradited back to Saipan, where he pleaded guilty to methamphetamine trafficking.

Reuters was unable to contact Fang or a legal representative.

Palauan authorities have taken some steps in recent months to combat Chinese organised crime. In December, President Whipps empowered his national security advisor to scrutinize visa applications and renewals. The advisor subsequently barred at least 91 people from the country, according to a review of government lists of prohibited people.

“Whether that organised crime is government-sanctioned or whether it’s just those individuals, we need to work together to stop them,” Whipps said about the country’s crime problem during his recent visit to Sydney. “We do know China has one goal, and that is for us to renounce Taiwan. But we hope that they understand that that decision is a sovereign decision and no country tells us who we should be friends with.”

Ehrendreich lauded the Palau crackdown as evidence of “a new level” of the island’s willingness and ability “to start dealing with their Chinese organised crime problem.”

The crime boom, however, has spooked residents who wonder whether the latest measures will be effective. Some also worry about getting caught between the two superpowers.

“The US military presence in Palau is a good thing,” said Vereen, the state legislator, who works as a boat operator at the radar facility on Angaur. But, he added, Palauans still remember from World War Two how they can be drawn into a ferocious conflict.

“We’re afraid that we’ve painted a big bullseye on our island,” he said.