An intelligence unit, manned by former police officers and operating out of the offices of Solomon Islands Prime Minister Manasseh Sogavare is suspected of running a smear campaign against Australians and the regional assistance mission, RAMSI.
The AAP news agency says a 61-year-old Australian Vietnam War veteran, Bill Johnson, may have been a victim of the campaign after he was arrested for allegedly plotting to assassinate Mr Sogavare last month.
The government has said little about the so-called "security intelligence unit", but funding for it appeared in this month's budget.
AAP says sources in Honiara, say this spy unit could be behind a campaign to blacken the names of RAMSI and Australia, and to improve the image of Mr Sogavare's government.
Mr Johnson spent a week in jail but was granted bail to reappear this Wednesday after the director of public prosecutions warned in court about police concocting stories.
AAP says the spy unit head, Oliver Osi, is believed to have been behind Mr Johnson's arrest and may have persuaded police to sign alleged statements.
The officers later changed their statements.
Police evidence included an accusation that Canberra would pay fifty thousand Australian dollars to the alleged plotters.