To China with Love

By Lisa Takeuchi Cullen

Katrina Leung was living the American Dream. An immigrant from China, she scored an Ivy League education, a luxurious home, her own business, even powerful political connections. And she also possessed some secrets. A longtime informant for the FBI, Leung, 48, was arrested at her San Marino, Calif., home last week and charged with copying sensitive documents for China. Her classified information allegedly came from her FBI handler, who happened to be one of her two lovers at the bureau. It sounds like classic grist for a made-for-TV movie, but the question is, Why did it take the FBI so long to catch on to the plot?

The saga began in the early 1980s, when James J. Smith, an agent in the bureau's foreign counterintelligence unit in Los Angeles, recruited Leung. Under the code name Parlor Maid, she received $1.7 million from the FBI over nearly two decades. The bureau says the two quickly began a sexual relationship that continued after Smith retired in 2000. During rendezvous at Leung's home, investigators say, she took documents from Smith's briefcase and photocopied them.

Leung's other lover was an FBI agent in San Francisco, whom bureau sources identified as William Cleveland Jr. In 1991, three years into this affair, Cleveland was listening to an electronic intercept of a phone call to a Chinese intelligence officer and recognized Leung's voice. Realizing the FBI had not authorized her to make such contacts, Cleveland alerted Smith, her chief handler, who said he would speak with Leung. Other counterintelligence officials also may have missed signals that Leung was a double agent and continued to use her as an informant. The FBI is now poring over all Chinese counterespionage cases since 1991 to determine whether Leung and her paramours compromised them.

Leung hardly looks the part of a modern Mata Hari, with her librarian glasses and hair in a bun. She lived with her husband and son in a $1.3 million house in the leafy L.A. suburb of San Marino. Although she called herself a venture capitalist and ran a consulting business from home, she spent much of her time courting California's political players. She was host of a fund raiser for the failed gubernatorial race of former L.A. mayor Richard Riordan and gave $10,000 to his campaign. When Chinese leaders Jiang Zemin and Zhu Rongji came to town, Leung organized 1,000-guest receptions.

Leung's double life began to unravel after Smith retired. In the process of re-evaluating her, agents began to suspect she was a double agent. After a year of surveilling her movements and monitoring her phone calls, faxes and e-mails, they confronted Leung last December. She admitted to her relationship with Smith and produced classified documents from her safe. These included memos on Chinese fugitives and informants, directories of FBI personnel and files from the espionage case of Peter Lee, a defense-contractor employee who pleaded guilty in 1997 to giving secret radar technology to China.

The FBI is investigating what went wrong. Its rules require that two agents handle informants, in part to avoid inappropriate relationships. And the large payments to Leung would have required approval from supervisors. When FBI Director Robert Mueller learned details of the case, say bureau sources, he was furious. He removed the division director, named a special task force to investigate the case and moved the entire human-asset operation to the new office of intelligence.

The repercussions for agents Smith and Cleveland are deeply personal. Smith, 59, admitted to the affair after the FBI had recorded him having sex with Leung in an L.A. hotel. Smith, who through his attorneys denies any wrongdoing, was charged with gross negligence and released on bail. Cleveland, who was not charged (and declined to talk to TIME), left the bureau in 1993 and took a job at the Lawrence Livermore National Laboratory, a nuclear-weapons research facility. He resigned last week, and the lab is investigating whether any of its classified data were leaked. As for Leung, she remains in custody as a flight risk. Her American Dream is now a bleak nightmare. --Reported by Elaine Shannon/Washington and Sonja Steptoe/Los Angeles

With reporting by Elaine Shannon/Washington and Sonja Steptoe/ Los Angeles