By Tom Perry
CAIRO (Reuters) - Arriving in Egypt last year, Julie Hughes had hoped to help write history by aiding the country's new generation of politicians and civil society groups to build a democratic future.
Instead, the American director of the National Democratic Institute is under investigation by authorities for funding irregularities at her U.S.-based group and is banned from leaving Egypt, a measure that prompted other activists to seek refuge this week in the U.S. embassy in Cairo.
Her hope for change, inspired by the fall of Hosni Mubarak at the hands of hundreds of thousands of protesting Egyptians, was punctured on December 29 when her offices were raided in connection with an investigation by Egypt's new military rulers.
The work of NDI, which is loosely linked to the U.S. Democratic Party, had fallen prey to what Egyptian pro-democracy campaigners say is a war between remnants of Mubarak's inner circle and a rapidly developing civil society.
It's a war, some campaigners say, that is more vicious than the one they fought under Mubarak, and it could further sour relations between Cairo and Washington, putting $1.3 billion of annual U.S. military aid in jeopardy.
But for the authorities, it is a matter of law; the non-governmental organizations broke it by receiving foreign funding without government approval.
For Hughes, the first casualty has been NDI's work with Egypt's budding new political class. "That is more than a little heartbreaking for us," Hughes told Reuters at her Cairo home.
A handful of Americans, including a son of a member of President Barack Obama's cabinet, are sheltering behind the fortress-like walls of the U.S. embassy for protection.
All employees of U.S.-based non-governmental organizations (NGOs) that have loose links to America's two leading political parties, they say they have been accused of running groups that were not properly licensed in Egypt and receiving foreign funding illegally.
A judicial source said on Wednesday the travel ban had been extended to three more Americans, taking the total to 17 U.S. citizens out of a total of 28 foreigners who have been prevented from leaving Egypt. The source expected the release of the probe's results next week.
The government has yet to confirm the specific charges, leaving the activists guessing as to what the punishment could be.
The groups work on everything from educating voters to advising politicians on how to build a successful coalition.
Hughes sums up the euphoria with which many activists arrived in Egypt.
"It's an honor to be right here now at this point in history: to see history being rewritten and being remade and people grabbing hold of their political future and helping them participate in the democratic transition," she told Reuters.
NDI has trained around 14,000 Egyptians in advocacy, voter education and election monitoring since April 1 last year and has brought speakers including former leaders of Poland and Chile, countries with an experience of democratic transitions.
But the investigation shows how far Egypt has to go before such organizations can operate as freely as they do in much of the world, highlighting what Egyptian activists describe as the persistence of the Mubarak-era mentality - one of fear of allowing too much debate.
Egyptians have also been targeted by the investigation. They accuse the military rulers of trying to row back on democratic reforms by silencing their number.
"It is one of the frontlines of the revolution," said Nasser Amin, head of an Egyptian-run organization working to advance judicial independence, which is also being investigated over its legal status.
"It is the counter revolution that is attacking us."
Egyptian activists said the fact that the investigation has been spearheaded by a government minister who served under Mubarak showed it was being pursued in his image.
But Faiza Abu el-Naga, minister of international cooperation, who has survived repeated cabinet reshuffles before and after Mubarak was driven out, has said the investigation is simply a matter of law.
"The rights groups that are being investigated received funds from abroad without government knowledge and in violation of the law," she told a news conference on the subject.
Some political analysts said the steps were being orchestrated by the ruling generals to try to secure leverage over Washington while rallying support around anti-American sentiment and undermining the reputation of their most vocal critics in the Egyptian-led NGO community.
But the generals will be careful not to lose the $1.3 billion in aid they get yearly in return for Egypt becoming the first Arab state to sign a peace treaty with Israel in 1979.
Congress has approved this year's payout, but it has also set conditions, including requiring that Secretary of State Hillary Clinton certify the Egyptian government is supporting the transition.
For now, Pentagon officials said the alliance with Egypt was still on solid ground.
"There are going to be differences of opinion. There were before the popular revolution there ... Part of what makes a relationship a relationship is the ability to continue to discuss and try to find a way to move forward even beyond the differences you might share," Pentagon spokesman Captain John Kirby said in Washington.
On a visit to Cairo, Michael Posner, the U.S. State Department's top human rights official, urged Egypt to resolve the NGO issue. And it will almost certainly be discussed in Washington, where an Egyptian military team is visiting.
TOO MUCH FOREIGN MONEY
Some Egyptian media have said American money poured into NGOs last year, proving there was a plot to subvert the course of change in Egypt.
The U.S. ambassador to Cairo had spoken of "close to $40 million" invested in organizations including NDI and the International Republican Institute, an NGO affiliated with the Republican Party which is also under investigation.
Hafez Abou Saeda, chairman of the Egyptian Organisation for Human Rights, said the state's aim was to sway public opinion against the pro-democracy movement.
"It is using this card to influence domestic opinion: to give the impression that the whole revolution is a foreign product," he told Reuters.
Abu Saeda's organization has faced no formal accusations in the current investigation, though he said his bank accounts were examined by investigators as part of the probe.
The case has a sense of deja vu for him. He was jailed in 1998, accused of receiving foreign funds to write a report in which he documented cases of torture by the security forces.
"Instead of putting the officers on trial, they arrested me and put me on trial and said I had received foreign funds to distort the image of the country," said Abu Saeda.
"It's always the issue of foreign funding that is used to defame the rights movement in Egypt," he said, adding that his organization gets most of its funds from the European Union.
OLD REGIME REMAINS
The restrictions placed on NGOs over the years have encouraged many to register their organizations in other ways.
The Arab Center for the Independence of the Judiciary and the Legal Profession, the organization led by Amin, has been registered as a not-for-profit company since it was set up in 1997.
"All of a sudden they have discovered that we have been working for 15 years without an (NGO) license," he said from his organization's office overlooking the Nile, describing being questioned for seven hours on Monday over the group's legal status and funding.
His 11th-floor office was among those raided on December 29 by investigators who confiscated documents and computers. Staff were still using their own laptops on Tuesday because the equipment had yet to be returned.
Amin said it was the return of the old days. The two judges investigating the case against his organization had formerly worked for Egypt's State Security Prosecution, part of a widely-hated security agency that was formally dissolved last year.
"The members of state security are still there in the apparatus," he said. "A year after the revolution, the old regime has started to regain its strength."
(Additional reporting by Ahmed Tolba in Cairo and Andrew Quinn in Washington; Editing Edmund Blair and Elizabeth Piper)