The American mining giant Freeport McMoran paid the Indonesian military more than $5m last year for protection in Papua, a troubled Indonesian province.
The Indonesian military are accused of human rights abuses in Papua
Confirmation of the long-suspected arrangement was contained within a confidential document leaked to the media.
Freeport paid the army to protect their employees at Papua's Grasberg mine, one of the world's largest gold and copper mines.
The Indonesian military have been accused of widespread corruption and human rights abuses in Papua, where they are trying to contend with a sporadic separatist revolt.
The relationship between Freeport and the military is a very serious blemish on the situation in Papua
Carmel Budiardjo, human rights activist
The document was written in response to queries from Freeport's shareholders, who were said to be uncomfortable with the security arrangements that the subsidiary Freeport Indonesia had in Papua.
The document details the payment of $5.6m to the Indonesian military in 2002, and $4.7m in 2001.
The money was paid for the employment of about 2,300 personnel, and covered costs for housing, fuel, travel and vehicle repairs.
A local Indonesian soldier admitted to the BBC's Indonesian service that "those who were on duty at Freeport got money for food and also got some pocket money".
Papuans distrust army guards at Freeport mine
The BBC's Jakarta correspondent Rachel Harvey says the admission, from the biggest company in Indonesia to what is basically a protection racket, is a significant move.
Human rights campaigners go even further, saying payments to the military provide an incentive for the maintenance of a high level of insecurity in Papua, which is also known as Irian Jaya.
Seven members of Kopassus, Indonesia's special forces, are on trial for murdering pro-independence leader Theus Eluay in November 2001.
The military has also been accused of taking part in the ambush and murder of two American teachers and a Freeport employee last year.
Indonesia took over de facto control of Papua in 1963
However the army has denied any role in the murders.
Carmel Budiardjo, a human rights activist, told BBC News Online that the relationship between Freeport and the military was "a very serious blemish on the whole situation in Papua".
Our Jakarta correspondent says that although Freeport is keen for the issue to be forgotten, now that the information is in the public domain it will raise questions that are unlikely to go away.
"Everybody officially knows what unofficially they thought they knew before - that money was exchanging hands," she said.
"But... is this an ethical way to conduct business?"
Freeport has been involved in mining in Papua since 1967, and the firm was one of the first big companies to invest in the province in the Suharto-era.