The United States has reportedly pressured Nauru into abandoning its policy of selling passports because of fears the documents were being used by terrorists.
The Australian newspaper also says Washington's has coerced Nauru into outlawing offshore banks following the bombing in Bali.
Washington believes both the banking regime and the passport sale scheme were open to exploitation by terrorists and organised criminals.
The paper says Nauru bowed to US demands to reform its banking sector in the expectation of wining substantial aid to save it from bankruptcy.
It is also reported to have allowed Washington to set up a listening post on the island nation.
But the US government denies it has promised any financial help.
But senior figures in Nauru says their nation has been strong armed by the US.
A former finance minister, Kinza Clodumar, said his country's sovereignty had been compromised.