When I.C. Smith and Bill Cleveland stepped off the plane in Beijing on Nov. 30, 1990, nothing prepared them for the reception they were about to receive. The two FBI agents had been dispatched to assess security at the American Embassy, a low-profile assignment. But from the moment they arrived, Smith and Cleveland were placed under heavy surveillance by the Ministry of State Security, China's KGB. "They were covering me," Smith recalls, "like a blanket."
It was as if the MSS knew who the agents were. Smith finally understood why five months later, when Cleveland called him from San Francisco. "I.C.," he said, "they knew we were coming, even before we left." Cleveland explained: A Chinese-American woman working as an intelligence asset for an FBI agent in Los Angeles had tipped off the MSS about their trip. Smith was dumbfounded. But he put the matter aside, assuming the FBI would can the woman for the security breach: "I assumed she would be closed as a source."
She wasn't. It was not until more than 12 years later, in fact--in April of this year--that the source of the leak was finally arrested. According to the FBI, she is Katrina Leung, a prominent Chinese-American bookstore owner, business consultant, and Republican fundraiser. The FBI now says that Leung, in addition to her many other accomplishments, was a top-drawer Chinese spy. A key source of the secrets Leung allegedly purveyed to her Chinese handlers, prosecutors allege, was the Los Angeles FBI agent who recruited Leung in 1982 and handled her until he retired in November 2000. That would be James Smith, known to friends and colleagues as "J.J." The FBI has arrested Smith, 59, a supervisory special agent on a Chinese counterespionage squad in L.A., saying he had an intimate and unauthorized relationship with Leung, 49, for more than 18 years. For at least 12 of those years, according to court papers, Leung stole classified intelligence information from Smith and passed it on to her handlers in China. Complicating matters further, the FBI alleges that Leung also conducted at least a seven-year affair with Cleveland. Now 60, Cleveland was a supervisory special agent who worked out of the bureau's San Francisco field office, on another Chinese counterespionage squad. Cleveland has not been charged and is cooperating with the Leung investigation. After he retired in 1993, Cleveland became head of security at Lawrence Livermore National Laboratory. He resigned that job in April after the FBI notified the lab that Cleveland was under investigation and the lab revoked his clearances. Lab spokeswoman Susan Houghton says a "cursory" investigation shows "no cause for concern" that Cleveland compromised nuclear secrets. The FBI has made similar assurances to the lab.
As intelligence debacles go, they don't get much messier than this. But even with its many salacious angles, the Leung case captured scant public attention last spring as the war with Iraq loomed closer. U.S. News has conducted an extensive review of the case since then, examining hundreds of pages of court records and interviewing more than a dozen current and former counterintelligence experts. The review reveals a systemic failure of security procedures and a stunningly free-and-easy pattern of access by Leung to some of the nation's most highly secret intelligence operations. The security breaches were also at least partly the result, sources say, of the FBI's failure to commit anywhere near the same kinds of resources to its China counterintelligence program as it did to its Soviet, and then Russian, counterpart. FBI managers compounded those problems, government officials say, by failing to ensure that the bureau stopped using Leung as an asset in April 1991, after it learned that she had tipped Chinese agents to the Beijing visit by the two FBI agents.
"Reliable." That's when Cleveland listened to an audiotape provided by another Chinese asset and recognized Leung's voice as she told the Chinese about his trip, according to court records. He alerted J. J. Smith, who flew to San Francisco to discuss the matter and became "visibly upset." Both men flew to Washington to broach the issue with officials at FBI headquarters. Neither man, however, appears to have told the FBI that he was having sexual relations with Leung. Indeed, FBI sources say, neither knew of the other's relationship with her. Smith returned to Los Angeles and spoke with Leung about her contacts with the MSS. She admitted it, prosecutors say, adding that the Chinese knew she was an FBI asset. Smith suggested that Leung take a polygraph, but she declined. He didn't press the issue. Cleveland, court records say, "relied" on Smith to resolve the problem; Smith assured him he had. In fact, he did nothing of the kind. Instead, Smith made Leung apologize to him and Cleveland, then filed the first of at least 19 evaluation reports stating that Leung was "reliable" and that she had passed a polygraph.