Report: FBI Failed to Identify Suspected Chinese Spy and Her Lover

WASHINGTON – The FBI missed many opportunities to identify a suspected Chinese spy and her FBI lover, including a tip that she "was in bed with" the bureau's Los Angeles office, a Justice Department internal review said Wednesday.

Katrina Leung, a Chinese-American paid informant for the FBI, and her handler, former counterintelligence agent James J. Smith, were able to deceive the FBI about their romantic relationship for nearly 20 years, Justice Department inspector general Glenn A. Fine said. In all, the FBI paid Leung $1.7 million over 18 years, Fine said.

FBI supervisors failed to act on two serious incidents just 10 months apart in the early 1990s that indicated Leung was passing classified information to China without FBI authorization, Fine said in the report's 23-page executive summary. The full report is classified, he said.

The FBI "relied on Smith to resolve concerns about Leung, and failed to follow up further to ensure that he had done so," Fine said. Smith told Fine's investigators that Leung got the information from him.

No one at the FBI suspected they were lovers, even after a supervisor who went to surprise Smith at the airport after a trip to London also saw Leung there at the same time, Fine said.

The Chinese-born Leung was recruited Smith to provide information about the Beijing government. The report said the FBI had substantial evidence that Leung actually was a Chinese spy who used her long-term affair with Smith to get access to sensitive government documents.

The FBI said in a statement that it "has already moved to address the systemic issues identified by" Fine that allowed Smith and Leung to escape detection for so long.

In mid-2000, a source told the FBI Leung was "in bed with" the bureau's Los Angeles office, the report said. Smith was informed about the tip, compromising any investigation, and an FBI official at its Washington headquarters said it was unclear that the comment was meant literally, Fine said.

The bureau waited until May 2001 to begin investigating whether Leung was a Chinese spy who had a source within the Los Angeles office. Fine faulted the senior bureau official in charge of the counterintelligence division for the delay.

Neil Gallagher headed the FBI's counterintelligence operations at the time. He retired in November 2001.

"It is particularly puzzling that the assistant director did not suspect Smith because the assistant director was overseeing the Robert Hanssen espionage investigation at the time," he said. FBI agent Hanssen was caught spying for the Soviet Union and Russia for years.

Even then, a preliminary report concluded that "an espionage relationship between an FBI employee and Leung is unlikely," Fine said.

Finally, a special task force was created in 2002 after FBI Director Robert Mueller, on the job for only a few months, expressed concern about the pace and scope of the investigation. Mueller asked for the inspector general's review.

Smith and Leung were arrested in 2003 and indicted on various charges, the most serious of which related to misuse of classified information. Smith pleaded guilty to lesser charges in 2004. A federal judge dismissed the case against Leung, rebuking prosecutors for misconduct.

While the government's appeal of the dismissal was pending, Leung agreed in December to plead guilty to making a false statement to the FBI and filing a false tax return.