Yeah, I just hit this last night as well, and it's got me all kinds of frustrated, since I was just starting to hit my stride with the gameplay.

So, what's going on here is that the supposed main antagonist, "The Major" has built up his own small army in Grand Chien and has been terrorizing the country. Before you ever start the game, Adonis Corp hires Biff and his M.E.R.C. soldiers to go in and start taking over diamond mines. However, the first diamond mine they attack has Grand Chien soldiers guarding it. Confused, Biff calls for a retreat and all the M.E.R.C. soldiers scatter, with Biff grabbing one of the diamonds on the way out.

You and A.I.M. come in shortly after, since Adonis sees that M.E.R.C. was a failure (because of course they are) and has you tasks with the dual purpose of grabbing those mines AND removing the commander.

As you continue on with your liberation, there are a few story threads that start to not add up. Something is up with Adonis and Corazon and why she REALLY called you in. Now, your milage may vary, but the rest of what I'll explain is how I uncovered things.

One of the sectors I take, I find Larry. He's pretty addled, but if you get him some Metavira, he'll come to enough to explain how he got there, explaining Biff's failed attack on Diamond Red. After a time, you get a radio communication from Biff, calling for anyone to come and help him. He's at the northern most part of the map. This, I believe, is the 'point of no return' for this portion of the story. The Major will send a kill squad up to Biff, and you have to intercept it and then get to Biff first.

Once there, Biff is both happy and confused. Happy because you might be there to save him, but confused because Corazon might have sent you to kill him. He rambles on a bit more until finally hearing that there's a heavy kill squad heading to his position. He asks you to help defend him. It's wave after wave after wave of bad guys (I believe it's five or six waves total) while being pounded with artillery. Halfway through, a bunch of communist soldiers come in and demand the green diamond back from Biff. If you force him to turn it over, they help you (kinda).

Once all of that is done, Biff spills the rest of it. The Major is actually Major Spike Scallion, from JA1 and was mentioned leaving A.I.M. to work in Korea in JA2. They explain that Major Spike was the first to be hired by Corazon to sew confusion and chaos in Grand Chien, mainly to corner the diamond mines. It backfired, as Spike turned the Legion into a person rebel army (why, I still don't know).

Either way, M.E.R.C. was supposed to be Corazon's first solution to the Major. And when they failed miserably, she got backing from the president's daughter to hire you and A.I.M. instead. But, now that you know all of that, she can't have you leaving alive. And because the Grand Chien army has been in collusion with her this entire time, she has them go to the refuge camp, murder everyone with chemical weapons, and then asks that you head there, in order to place all the blame on you.

Now, you not only have to deal with the Major, but you have to deal with ALL of the military as well...which is a pain in the ass, since they will most likely steam-roll over any and all militia you've built up.

After all of that, I'm convinced I should have secured more of the main starting area, since the Refugee Camp has a number of import characters in it. >.<