U.S. Department of Justice

Office of the Inspector General

i

• .

| m ............. i

A Review of the FBI's Handling and Oversight

of FBI Asset Katrina Leung. (U)

Unclassified Executive Summary

Office of the Inspector General

May 2006
EXECUTI_ SUMMARY

I. Introduction

In May 2000, the Federal Bureau of Investigation (FBI) receiw_d

credible information that Katrina Leung, one of the FBI's most highly paid

assets, was actively spying for the People's Republic of China (PRC) against

the United States. 1 A year later, the FBI began an investigation that led to

the discovery that Leung had been involved in an intimate romantic

relationship witZh her handler of 18 years, Special Agent James ,J. Smith,

who retired from the FBI in November 2000, The investigation also revealed

that Leung had been involved in a sporadic affair with William Clevdand,

another highly regarded FBI Special Agent, who retired from the FBI in

1993. The FBI's investigation further established that over theyears, FBI

officials had lea:reed of several incidents indicating that Leung had provided

classified U.S. government information to the PRC without FBI

authorization. During the 18 years Leung was an asset, the FBI paid her

over $1.7 million in services and expenses.

In April 2003, Smith and Leung were arrested. FBI Director Robert

Mueller asked the Office of the Inspector General (OIG) to reviewthe FBI's

handling of Leung and the performance and management isSues relating to

her case, and to recommend changes to improve FBI procedures and

•practices where necessary. The OIG's investigation revealed that the FBI

did little or nothing to resolve the numerous counterintelligence concerns

that arose during Smith's handling of Leung. This report describes the

OIG's investigation and provides recommendations designed to address the

flaws we identified, including the FBI's failure to consistently document

concerns about Leung, its failure to follow up when concerns arose, and its

willingness to exempt Smith from the rules governing asset handling.

II. Methodol[ogy and Scope of the Report

The OIG reviewed and analyzed more than 300,000 pages, of material

from the FBI and other Intelligence Community agencies. We conducted

more than 100• interviews in Los Angeles, San Francisco, Northern virginia,

Southern Maryland, and the District of Columbia. The team interviewed

Smith's former colleagues . and supervisors at the FBI. We inteF_iewed much

of the hierarchy of the FBI's Counterintelligence Division. In addition, we

interviewed DOJ and Intelligence Community personnel who had

involvement with Smith, Leung, or the investigations of them. The team

also interviewed. Smith and Cleveland extensively.

c

1 In this report, the terms 'China' and 'PRC' will be used interchangeably to, refer to

the People's Republic of China.

1
We provided copies of the report to the FBI for its comments

concerning factual accuracy and classification. The 236-page re,port has

been classified by the FBI at the Secret level because, according to the FBI,

it contains sensitive classified information regarding intelligence: sources

and methods. 2

The full report is divided into four chapters. Chapter One provides

the backgrounds of Smith and Leung and an 'introduction regarcling the

FBI's ChineseCounterintelligence Program. Chapter Two addresses the 18-

year period during which Smith Operated Leung and is divided into four

time periods. Chapter Three examines the FBI's investigations of Smith and

Leung and describes the steps the FBI has takento address the problems in

the China program. Chapter Four contains the OIG's conclusions and

recommendations. This unclassified summary of the report summarizes the

findings, conclusions, and recommendations of the report.

III. The OIG Investigation

A. Background

The FBI's China program faced several significant challenges during

the time Smith operated Leung. Field agents, supervisors, and program

managers told us they were overwhelmed by the volume of work that

required their attention. They said that during the years Leung served as

an FBI asset, the FBI's China Program was understaffed, overworked, and

experienced regular turnover in management. This report exp]Lores how, in

this environment, the FBI failed to detect the activities of Smith and Leung

and failed to address problems when they arose.

I. The FBI's Chinese Counterintelligence Program

After the United States and China normalized relations in 1979, the

Chinese presence in the United States increased dramatically. By 1[982,

there were approximately 10,000 Chinese students in the United States and

more were arriving at the rate of approximately 300 students per month.

The number of Chinese visitors to the United States also increased to more

than 15,000 pe:r year and the number of Chinese immigrants exceeded

14,000. The FBI determined that the most effective means to counter the

threat posed by this increased presence was to develop a large asset base,

However, onlya few FBI agents wereavailable to investigatean increasing

population of Chinese students, visitors, and government officials.

In the early 1980s, FBI Headquarters delegated a great deal of

authority to the field to recruit, develop and handle assets. The devolution

of authority from FBI Headquarters to the field had both positive and

2 We have provided the full report to the FBI, DOJ officials and Congressional

committees with oversight responsibility for FBI programs.

2
negative consequences: the field divisions had the flexibility to develop and

implement creative operations to address counterintelligence .concerns, but

FBI Headquarters program .managers told us it left Headquarters rn.anagers

with the belief that they could not give orders to the field or interfere in field

operations.

2. Smith's Background and FBI Career

Smith, a college graduate and Vietnam veteran, entered on duty with

the FBI in October 1970 as a Special Agent. Following his first office

•assignment in Salt Lake City, Smith spent the remainder of his FBI career

in Los Angeles. He specialized in FCI PRC matters from 1977 until his

retirement in 2000. Smith received promotions and was frequently

commended for his performance.

By 1982, when Smith opened Leung as an asset, the FBI considered

him to be an agent who needed supervisory direction only in those instances

where he clearly lacked the authority to act unilaterally on behalf of the FBI.

. . Smith had achieved a level of trusted independence and his supervJisors

relied on his judgment and his recommendations regarding the squad's

.;.::!.i. ....in,_estigative :_. responsibilities. .

....... Smith was promoted to China Squad supervisor in Los Angeles in

...... 1996, yet retained sole responsibility to handle Leung. By all accounts,

Smith was knowledgeable of the China target, successful, well respected,

• . and experienced in the work of the China squad.

3. Leung's Background

Leung's family background is unclear because her official immigration

_,:!.!_file contains substantial discrepancies between what official documents

reveal and what Leung ultimately told Smith about her ancestry. Along with

-. a woman who claimed to be Leung's mother but was probably her aunt,

Leung emigrated to the United States in 1970, using a Taiwanese passport

stating that she was born on May 1, 1954, in Canton, China. Eight days

after their arrival in the United States, Leung's _'mother" married a U.S.

citizen. Leung enrolled at Washington Irving High School in New York City

and graduated in June 1972. Leung became a permanent resident alien on

August 7, 1972.

Leung obtained an undergraduate degree from Cornell University in

1976 and a Masters in Business Administration fromthe Universi_T of

Chicago a few years later. In the 1970s while she was a student, Leung

began to develop contacts with, and access to, persons of investigative

interest to the FBI.

3
r

4. Leung Comes to the Attention of the FBI

In early 1'980, Leung moved to Los Angeles, where she resided in an

apartment building the FBI characterized as a "nest of spies" that was

occupied by subjects of other FBI investigations. Upon her arrival in Los

Angeles, Leung became the general manager of an import-export company

suspected of engaging in the illegal transfer of technology from the United

States to the PR.C. In late I980, the FBI began a full espionage investigation

of that company.

The FBI authorized a full field counterintelligence investigation of

Leung on February 10, 1981 predicated on her contacts withpersons of

investigative interest to the FBI. FBI documentsstated that Leung was

"believed to be engaged in clandestine intelligence gathering on behalf of the

PRC and/or may be furnishing or about to furnish sensitive teclhnological

information to the PRC."

After the case agent originally assigned to investigate Leung

transferred from Los Angeles, Leung's case was assigned to an

inexperienced agent who was admittedly uninterested in FCI matters. One

month later, in August 1981, the Los Angeles Division learned that Leung

had a close relationship with a pro-PRC activist who was also a principal

subject in an FBI technology transfer investigation conducted by the San

Francisco Division. San Francisco agent William Clevelandwas the lead

case agent for the investigation, and Smith was assigned to be the case

agent for the Los Angeles aspects of that investigation.

,.

The Los Angeles Division took. no immediate action afterit learned

.... about Leung's relationship with the subject of the San Francisco

investigation. The FBI learned that Leung had left her job as general

manager of the import-export company in early 1980, and in Nc)vember

1981 the Los Angeles Division closed the Leung investigation. The (:losing

communication contained no reference to Leung's relationship with the

Subject of the San Francisco technology transfer investigation and no

resolution of the issue of Leung's other PRC contacts, the primary reason

the FBI opened the investigation of Leung. Instead, the closing

communication stated that Leung was unlikely to cooperate with the FBI.

With the approval of her squad supervisor, the FBI agent to whom Leung's

case had been reassigned closed the case without attempting to interview

her, telling us that she believed she could not interview Leung because

Leung was the ,,subject of an investigation.

The case agent's rationale is incomprehensible. According to FBI

documents, the.. standard objective of investigations such as the'. one opened

on Leung was to determine whether the subject posed a threat to national

security or had asset potential. FBI documents also state that the most

logical way to resolve this objective is often through an interview of the

subject. Further, neither the squad supervisor nor the case agent could
have known whether Leung would be cooperative without attempting an

interview.

Based on our review, we concluded that the Los Angeles •Division

should not •have treated the investigation of Leung as dismissively as it

seems to have, especially in light of her connection to two ongoing

technology transfer investigations. During the early 1980s, the FBI knew

little about China's quest •for technology. Once the FBI authorized a full

foreign counterintelligence investigation of Leung, the Los Angeles Division

should have given the case more attention. The FBI's failure to fully

investigate Leung early on was a lost opportunity to obtain information

concerning the PRC's attempts to acquire technology and her contacts with

persons of investigative interest to the FBI.

B, Significant Time Periods

C_ • o

In 1982, omlth developed Leung as an FBI asset. He continued to

operate her as an asset for 18 years, until he retired from the FBI in

November 2000. The following sections summarize the OIG's findings from

• •i:o_Urreview of Sraith's 18-year operation of Leung as an FBI asse.t.

........_,_. ,,_.

_._ ........: .....

....:_ _:_:__ I. First Phase: 1982'1983

By 1982, the FBI knew about Leung's contacts with persons of

.... investigative interest to the• FBI, that •she had been the general manager of

........•an import-export company suspected of conducting illegal technology

transfers to the PRC, and that she was linked to a pro-PRC activist and

....:_i.._:_-_principalsubject of the San Francisco technology transfer investigation, who

•_:_._:•!hadbeen arrested in the PRC. The San Francisco investigation had stalled.

•• In August 1982, Smith decided to re-open the investigation of Leung

in the hope thai: she could provide information concerning the l:_rincipal

subject of the San Francisco technology transfer case and other matters.

Smith first interviewed Leung in August 1•982. According to Smith, Leung

was very forthcoming with information concerning a number of matters of

interest to the FBI. Smith interviewed Leung several times during the fall of

1982, and in December 1982 Leung was converted from the subject of an

investigation to an FBI asset.

When Smith opened Leung as an asset, he was a 12-year veteran

Special Agent with over six years' FCI experience, five of which involved the

China program. The FBI recognized Smith's success in developi[ng and

handling other assets and trusted his judgment.

Smith obtained Leung's immigration records, conducted the requisite

criminal checks, attempted unsuccessfully to obtain Leung's toll records

(the local service provider refused to honor the letters), cross-referenced her

information with•information other assets provided about her, and asked

FBI Headquarters for all the information contained in its indices about

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Leung. We found no indication that Smith's background investigation and

vetting of Leung prior to her conversion into an FBI asset was inadequate.

Consistent with her high profile in Los Angeles, Leung's access to

Chinese diplomatic officials and prominent overseas Chinese in the United

States enabled her to obtain and provide information of significance, to the

FBI. 3

In August 1983, less than a year after Smith first interviewed Leung,

they began their sexual relationship. Smith said he was confident that

Leung would not disclose their relationship or try to blackmail him,

:reasoning thatshe had lust as much to lose ashe did.

The OIG found no indication that, at this time, anyone in the FBI

suspected that Smith had begun an intimate relationship with Leung.

When Smith began the affair with her, he was considered one of the top

agents on the Los Angeles Division's China Squad.

2. Second Phase: 1984-1989

Throughout the_ 1980s, FBI Headquarters delegated a greatdeal of

autonomy and authority to. the field to conduct China program operations.

Smith operated Leung with only a modicumof substantive input from his

supervisors in Los Angeles and at FBI Headquarters.

With Smith's assistance inaccelerating the process, Leung became a

U.S. citizen on March 16, 1984. By then, the FBI's plan for Leung was to

have the PRC intelligence services (PRCIS) recruit her as an agent of China.

To facilitate this, the FBI encouraged Leung to flaunt her contact with the

FBI and her high-profile status in the Chinese community: in the United

•States. _

In June 1984, Leung began traveling frequently between the United

:States and the PRC as a double agent working on behalf of the United

States, gathering information from the PRCIS and reporting it back to the

FBI. The PRC's Ministry for State Security (MSS), a counterintellige.nce

agency of the PRC, recruited Leung. FBI documents indicate that. the pRCIS

believed that Leung was a low-level source of the FBI's Los Angeles office.

In August: 1984, the FBI began providing monthly payments to Leung

for services and expenses. In September 1984 and in January 198(5, Leung

passed FBI polygraph examinations regarding whether she had unreported

contacts with Chinese intelligence services, whether she had deliberately

provided the FBI with false information about her contacts with the

Chinese, and wlhether she had told anyone she was cooperating with the

FBI.

3 The PRC refers to individuals who were born in China but live elsewhere as

"overseas Chinese."

..

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....
• •In 19,84, Smith became the lead case agentfor the espionage

investigation of :former FBI Agent Richard Miller, who was suspected of

unlawfully passing classified information to Svetlana Ogorodnikova, a•Soviet

agent with whom Miller Was having an affair. At the same time, Smith

continued the cIandestine romantic relationship with Leunghe lhad begun a

year earlier, telling us he viewed the Miller case as merely a "cautionary

tale." Smith's supervisor told us that one day during the Miller

investigation, when Smith said he was going to meet Leung, ' the supervisor

casually asked o(_mlth " whether he was involved in a Miller-Svetlana

situation. The supervisor said he accepted Smith's denial because ]he

trusted him. The supervisor said he never truly suspected that Smith was :

actually romantically involved with Leung.

Between the mid-1980s and 1990, Leung became more well known

•.and well-connected in the West Coast Chinese community, entertaining PRC

diplomatic officials and• •Organizing huge banquets for high-level PRC

government officials who visited Los Angeles. Through these acl:ivities,

Leung met PRC President Yang Shangkun,• who became her patron. Leung's

conn_ec_tions to Yang and to the PRC's diplomatic community on the West

•Co•ast•also put her in the position of advisingthe PRC concerning the

location for a new PRC Consulate in Los Angeles in 1988. Leung's access to

officials at the San Francisco Consulate• also was useful to the San

Francisco Division's China Squad, and she provided reporting concerning

the activities of San Francisco Consulate officials who visited Los Angeles.

••.:_ We found that the FBI vetted Leung and validated her information in

.....the_;.1980s. However, we found one incident that •should have caused the

•:FBI:.qoncern about Leung during this period. In late 1987, Leung asked a

PRC_Qonsulate official in San Francisco to call her from a pay te:lephone,

implying that she had something to tell him that she did not want others to

hear) Altl_ough the FBI Los Angeles Division initiated an investigation into

the matter, the investigation was closed when the case agent lem-ned that

Leung was an FBI asset. There is no documentation in the file to indicate

whether Smith authorized Leung to contact the consulate official, and no

follow-up from anyone at the FBI concerning •why Leung made such. a

contact or what she discussed. Neither Smith nor his supervisors

documented any resolution of the matter.

Other than that incident, the FBI had no reason to question Leung's

reporting and access through the end of the I980s. Leung passed two

polygraph examinations, and an experienced San Francisco agent and an

FBI Headquarters analyst gave Leung positive assessments regarding •her

access to information and her suitability as an FBI asset. A Chinese

defector also confirmed much of Leung's reporting during this time. CIA

officials, who received much of the information Leung reported concerning

the PRC, also provided positive feedback on her reporting. By the end of

1989, Leung's prominentplace in the FBI's China program was assured•

,
when she traveled to the PRC shortly after the Tiananmen Squa_re incident

and reported infbrmation to the FBI concerning political Conditions in the •

PRC government, at a time when virtually no such information made its way •

out of China.

During the late 1980s, unbeknownst to Smith or anyone else in the

FBI, Leung and San Francisco SSA William Cleveland also began a sporadic

sexual affair, fac'ilitated by Leung's travel •to San Francisco for matters

unrelated to the FBI. Smith had introduced Leung to Cleveland anci.to

several other San Francisco agents because Leung was considered a

resource for information concerning the San Francisco Division's technology

transfer investigation and individuals at the PRC's San Francisco Consulate.

Cleveland was described to us as a very religious man who was universally

well regarded, dedicated to the FBI, and considered a mainstay m the FBI's

China Program :in the• 1980s and early 1990s until his retirement in 1993.

According to Cleveland, •Leung initiated their relationship. He toldus

that Leung did not try to elicit information from him and he did not discuss

FBI matters witl_ her when they were alone. Smith admitted to us that he

shared operational information ;with Leung, but Cleveland steadfastly

maintained •that he provided no information to Leung, nor did she ask him

for it. Cleveland was later interviewed extensively by the FBI in 2002 and

described in detail his relationship with Leung. He passed a

counterintelligence-focused polygraph examination during whiclh he denied

providing sensitive information to any representative of a non-U.S.

intelligence service.

3. Third Phase: 1990'1996

•We found that in the 1990s, several events should have led the FBI to

question the extent of Leung's loyalty to the United States and the nature of

Smith's relationship with her. Two of the most serious incidents in the early

1990s showed that Leung was providing classified information to the PRC

without FBI authorization. However, the FBI failed to document the

incidents in Leung's file, relied on Smith to resolve the concerns about

Leung, and then failed to follow up further to ensure that he had done so.

These incidents underscore the need for consistent documentation of red

flags and negative reporting in an asset's file and an explanation of how

concerns arising from such matters are resolved. The incidents also

highlight the need for continuous objective assessment of an asset's bona

tides and illustrate the dangersin allowing a •single agent to handle an asset

for such a long period of time. •

a. Red Flag in 1990

In June 1990, the FBI received reporting indicating that I,eung had

disclosed to PRC officials the existence and location of a then-actiw_

sensitive technical operation that remains classified, as well as aspects of a

8

I
highly classified FBI counterintelligence program. This reporting raised

serious questions concertiing Leung's unauthorized activities on be]half of

•the PRC, However, we found that the FBI's response to. this event was

inadequate.

Although there were several communications between FB][

Headquarters and Los Angeles concerning this matter, the communications

were not consistently captioned, and as a result they were placed in

different files. Almost no documentation of the incident was placed in

Leung's file. The FBI Headquarters Unit Chief responsible for oversight of

both the technical operation and counterintelligence program questioned

Smith concerning the incident and accepted smith's explanation that Leung

could not have made the disclosure about the counterintelligence program

because Smith had not known about it. The Unit Chief failed to ask further

follow-up questions and did not question Smith concerning Leung's

disclosures concerning the technical operation, We found no indication that

the Unit Chief, who is now retired, ever attempted to resolve the concern

that Leung not only knew about the technical operation but also disclosed it

...... totl_iPRC. FB][ documents show that another China Section Unit Chief,

• who_as responsible for oversight of Leung at the time, was also aware of

,,i_: the matter and :[ailed to take any action to ensure that it was resolved.

.... Weconcluded that FBI Headquarters made a significant mistake by

...... failing to follow up on the concerns raised by Leung's disclosures. The

_ reportingshould also have exposed the FBI's lack of control over

information Smith shared with her.

..... b. Red Flag in 1991

•-• :_!_n April 1991, just ten months later, the FBI learned that Leung was

using an alias to communicate with her PRC handler. During t]hese

conversations, Leung disclosed details concerning ongoing FBI operations

and investigations. Again, the FBI did not adequately address the issue.

Although FBI Headquarters held a meeting to discuss the matter, we found

no documentation of the incident in Leung's file except for the •

communication arranging the meeting at FBI Headquarters.

Moreover,. the full extent of Leung's disclosures was not provided to

the participants at •the meeting. A China analyst present at the meeting was

unaware that Leung had actually provided to the PRC details of ongoing FBI

operations and investigations. The analyst was also unaware of Leung's

previous disclosures to the PRC concerning the sensitive technical operation

and aspects of the classified FBI counterintelligence program. During the

meeting, the analyst expressed no sense of alarm at those of Leung's

disclosures of which he was aware. The analyst said he believed at the time

that the FBI was gaining far more from Leung than it was giving away.

Consequently, the analyst advised against terminating Leung as an. asset

and his recommendation was accepted.

9
We found that Smith's reputation at the time was such that he was

treated as beingabove reproof. Participants at the meeting told us that

there was a sense that Smith needed to assert stronger control over Leung,

but FBI Headquarters matiagers decided to let Smith personally resolve the

concerns about Leung. However, FBI Headquarters failed to follow up to

ensure that he had done so. Incredibly, no one questioned how it was that

Leung had obtained the information she supplied to the PRC. During our

investigation, Smith conceded that he was the source of any information she

supplied to the PRC. Had the FBI followed up and pursued the reliability

concerns arising from this reporting about Leung's activities, the

fundamental flaws in Smith's operation of her might have been revealed 10

years before the FBI actually began such an investigation.

c. FBI Management Failures

We concluded that the performance of both the Unit Chief' and the

Assistant Section Chief, who were responsible for oversight of Le.ung during

both the 1990 and 1991 incidents, was deficient. FBI documents establish

that they were aware of the two incidents, yet, despite Leung!s stature in

the FBI's China program, neither drew a connection between the two

matters that raised serious concerns about the extent of Leung's loyalty to

the United States.

•The FBI's Los Angeles Division also failed to provide adequate

oversight of Smith at this time, enabling him to respond •to the few concerns

FBI Headquarters did express without input or follow up from his chain of

command. The Los Angeles SSA who supervised the China Squad at the

time of the 1990 reporting admitted tous that he readily deferred to Smith

because he was very impressed with him and because Smith hadbeen on

the China Squad for so long.

. .

Atthe time of the 1991 reporting, Smith was theacting supervisor of

the squad and he did not inform the incoming SSA about the derogatory

reporting. The Los Angeles ASAC who was responsible for FCI matters at

the time claimedhe had no recollection of either incident; however, FBI

documents show that he was aware of sufficient information to haw_ put

him on notice that there was a problem with Leung.

When we asked Smith why he continued operating Leung despitehis

knowledge that she had disclosed classified information to the PRC without

FBI authorization, he stated, that he-believed Leung was too important to be

discontinued as an FBI asset. However, he admitted that he feared that

exposing her.disclosures would result in an inquiry that could have exposed

his romantic relationship with her, ending both the case and his career.

According to Smith's contemporaneous notes, he confronted Leung

about her alias .and her disclosures. Leung responded that the PRC had

discovered her relationship with the FBI in 1990 and had coerced her into

cooperating with them. She told Smith that she had to give information to

10
the PRC in order to get information from it. Smith said he told Leung she

would have to take a polygraph exam and she refused. According to Smith's

notes, Leung confirmed that she disclosed what Smith knew was sensitive

and classified material c6ncerning FBI operations and investigations.

Smith told us that he did not consider ending his professional

relationship with Leung because he truly believed he could regain Leung's

loyalty to the United States. But Smith did not inform anyone at the FBI

about the details of his confrontation with Leung. Instead, he merely

asserted that the matter had been resolved. His FBI Headquarters

managers accepted him at his word and failed to further question him.

Smith's managers should have •required him to re-assess Leung"s reliability

and bona tides and report back to FBI Headquarters, but they failed to do

so. Smith said that for the next three or four months, he was more

circumspect with Leung than usual, but eventually things went back to the

way they had been before the issues arose and the entire matter appeared to

be forgotten.

........ •The FBI's failure to closely question Smith to resolve how it was that

• .,$_'_:.. "_.

Leung']earned t]he detailed information she supplied to the PRC was

seriously deficient, because Leung's disclosures could have had serious

••adverse consequences for the United States' security interests. The lack of

documentation !in Leung's file concerning the two incidents also facilitated

the FBI's failure to follow up. Had documentation of the two separate

_•:_•:••occurrences involving Leung been placed in her file, the FBI might have

.... been able to minimize further damage resulting from her actions.

_•_....... _ " •Smith continued to operate Leung largely unquestioned throughout ' • • _i. "

the • 1990s. Between 1990 and 1992, there were three different supervisors

for th'_• Los Angeles China Squad and two different ASACs. Smith's

supervisors in Los Angeles continued to overly defer to him because he was

perceived as an expert in the China Program. We found that Smith took

••advantage of FR.I Headquarters' failure to follow up and intentionally kept

•his inexperienced supervisors in Los Angeles uninformedabout the

concerns about Leung. Although Smith's supervisors conducted the

requisite reviews of Leung's tile with him, they were not familiar with the

incidents concelming Leung's disclosures to the PRC because they were not

consistently documented in her file.

Throughout the 1990s, Smith continued to characterize Leung as

"reliable" and '_stable" in his., communications to FBI Headquarters about

her. In his semi-annual evaluations of Leung, Smith affirmatively misled

his supervisors into believing that she had recently been polygraphed. In

fact, she had not been polygraphed since 1986. By March 1993, the FBI

had paid Leung over $700,000. No one questioned Smith's characterization

of Leung and his supervisors continued to approve the budget requests

Smith submitted for her every six months.

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d. Smith's Los Angeles Supervisor Encountered

Smith and I_ung Returning from an Ovelrseas

Flight and Failed to Alert Anyone in the FBI

Another egregious management failure occurred inMarch 1992, when

Smith took five days of annual leave to take a sightseeing trip around the

United Kingdom following a work-related trip to London. Unbeknownst to

anyone in the FBI, Leung had flown to London to accompany Smith on his

sightseeing trip.

Smith's supervisor, who transferred from FBI Headquarters to Los

Angeles in late 1991, decided to surprise him by meeting him at the airport

upon his return to Los Angeles. The supervisor, who was acquainted with

Leung, saw Leung at the airport when she went to meet Smith, but told no

one in the FBI about her observation. When interviewed as part of the FBI's

investigation of Smith and Leung, the supervisor initially admitted that she

saw them both in the Customs area of the airport after they disembarked

from their flight. However, she later claimed to the FBI and to us that she

did not see them together; rather, she said she went to the airport twice and

saw Smith and Leung there on different days.

We found that the supervisor's version of events was not consistent

with the evidence. Customs records establish that Smith and Leung were

on the same fligJht and entered Customs processing at the same time.

Further, Smith told us that he returned to the United States on the same

flight as Leung amd that his supervisor picked him up but did not mention

Leung at all during the ride home. Smith said he was concerned that his

supervisor had seen Leung and Would then raisethe issue with him or with

FBI Headquarteirs, but the supervisor faiied to doso.

Despite being confronted directly with evidence that Smith and Leung

were engaged in an inappropriate relationship, Smith's supervisor did not

question him, confront him, or report the situation to FBI Headquarters.

We found that the supervisor was overly dependent on Smith, reluctant to

confront him, and inappropriately deferential to him. Had she made tier

supervisors and FBI Headquarters aware of this issue, Leung's trip with

Smith might have forced the FBI to examine their relationship.

e. Smith's Overt Relationship with Leung Results

in Dismissa_ of Negative Reporting about her

Smith and Leung were frequently seen together at Chinese Consulate

functions and banquets honoring Chinese dignitaries that Leung organized

throughout the early 1990s. Smith and other agents on the China Squad

attended such functions in accordance with the FBI's role in the protection

of foreign officials. They also attended to make contacts within the Chinese

community in order to obtain counterintelligence information. ,_mlth and

Leung's overt relationship at these events facilitated these contacts, but it

12
also •functioned as a mechanism for Smith to easily deflect any negative

reporting by other assets about Leung.

In 1992, the Los Angeles Division received credible reporting

indicating that the PRC:had a person "working in the FBI," a woman named

"Katrina" who was a double agent. However, an inexperienced agent on Los

Angeles's China Squad omitted Leung's name from the teletype transmitting

this reporting to FBI •Headquarters. •

In an attempt to resolve the matter, FBI Headquarters •directed Smith

and an analyst to debrief the source of the reporting, unaware t]Sat the

source had implicated Leung. Smith was the most experienced agent on the

China Squad, and •it would have been logical for Smith to have been

involved in the debriefing had Leung not been the source of the problem.

Smith's •teletype to FBI Headquarters detailing the debriefing did not conceal

that Leung was the subject of the negative reporting. However, Smith also

was able to deflect any concerns this reporting raised by criticiziing the

source i_ofthe information as a liar and a misogynist and by rationalizing

that _the •information was consistent with Smith's overt (and approved)

relat_pnship wifla Leung.

..... •..... _•_:_:We • found that Smith's supervisor in Los Angeles was too deferential to

.... Smith to question his lack of objectivity in defending Leung to FBI

Headquarters and took no further action to resolvethe matter. At this time,

the personnel at FBI Headquarters overseeing Leung were relatively new to

_:i_:•_the•China program, were unaware of the earlier concerns about Leung, and

_• thought so highly of Smith that they did not question his resolution, of the

••,_:•_•matter. As a result, FBI Headquarters let the matter of the negative

repo_ting about Leung drop, with no further follow up.

........ f. FBI Headquarters Managers Believed They Could

not Interfere in Field Operations

During our review •we found that many FBI Headquarters managers

believed that they could not interfere in field office counterintelligence

operations unless the field's actions contravened specific rules in the

Foreign Counterintelligence Manual (FCIM). In a 1995 report, FBI

Headquarters touted the success of the decentralized approach, noting that

managers were !instructed to take a "hands off' approach and to always say

_yes' to the field unless there were specific reasons to say 'no.' Several FBI

Headquarters supervisors told us that as a result of this approach, they

believed they were in no position to tell the field what to do, and they did not

perceive their responsibility as truly supervising or exerting control over

field operations. Rather, they functioned in a support role.

This attitude was demonstrated by one incident in which .an FBI

Headquarters SSA became suspicious that Leung•had been "redoubled"

against the United States. Instead of raising his concerns directly to Smith

or to Smith's supervisor in Los Angeles, the SSA expressed them in an

13
administrative note attached only to the FBI Headquarters copy ,of a

document responding to a Los Angeles communication. The SSA told us

that the purpose of the note was an attempt to keep FBI Headquarters'

executive management informed that there may have been an issue

concerning Leung's loyalties. We found no reaction to the administrative

note and the SSA did not follow up on his concerns.

Nevertheless, the SSA said he had become sufficiently concerned

about Leung's re,porting and the amount of money the FBI was paying her

that he asked art analyst to do an in-depth review of Leung's file at the end

of 199.5. However, the SSA was transferred before the review was Complete.

The analyst discovered that Leung had not been polygraphed in ten years.

The analyst drafted a teletype to Los Angeles directing that Leung be

polygraphed within six months. Unfortunately, the incoming SSA, who is

now retired, altered the teletype because he believed the language the

analyst used was too strong. He told us that FBI Headquarters ,could not

compel the field to take action not specifically required by the rules. The

SSA changed the language in the teletype from an order that Leung be

: polygraphed to a suggestion that Los Angeles consider polygraphing Leung.

Smith used the :much softer language of the edited teletype as reason to

ignore it, and Leung was not given a polygraph exam.

The numerous red flags that appeared between 1990 and 199'6

should have placedthe FBI on notice of serious concernsabout Leung's true

loyalties, as well as Smith's relationship with her. Several factors

contributed to Smith and Leung's evasion of sustained supervisJion. One

problem was constant turnover of management: there were four different

FBI Headquarters first-line supervisors with oversight responsibility for

Leung between 1990 and 1996, and three different China Squad first-line

supervisors in Los Angeles. As a result, Smith was the only person in the

FBI with a complete understanding of LeUng's operation.

In addition, Smith's supervisors in both Los Angeles and at FBI

Headquarters told us that they did not have time to read Leung's

voluminous reporting in its entirety. Even if they had, documentation

concerning the numerous red flags about Leung that surfaced during this

time period was not consistently placed in Leung's file, and there was no

centralized repository of derogatory information to warn Smith's supervisors

about the problems with Leung.

Despite the problems that arose during this period, Smith operated

Leung with little oversight based primarily on his status as a top agent in

Los Angeles and Leung's status as atop asset. While there were strong

indications that: Leung was providing classified information to the PRC and

that she had an unduly close relationship with Smith, the FBI failed to take

action to address these concerns.

14
4. Fourth Phase: 1996-2000

In October 1996, Smith• was promoted to SSA of the China Squad in

Los Angeles. Until his retirement in November 2000, he continued• to

operate Leung as a source with little tono supervision or oversight. Smith

alsocontinued to treat Leung as though she was a member of his squad,

sharing information and consulting with her about FBI operations and

investigations.

Smith's AooAC, who transferred to Los Angeles in 1996, had no prior

PRC FCI experience. He did not review Leung's file, did not conctuct

meaningful file reviews with Smith, and deferred to Smith, much like

Smith's previous supervisors. The ASAC permitted Smith to sign out his

•own communications to FBI Headquarters concerning Leung. The ASAC

approved Leung"s asset payments but he did not examine the lists of

itemized expenses Smith submitted, reasoning that Leung's budget was

•akin to .•a salary and that she would be paid the entire amount allotted for

her b_idget for services and expenses every six months.

._.,_..

••• •i_!!_::_he ASAC did notice that in April 1990, Smith had received

.....:: authorization from FBI Headquarters to pay Leung without a witness

.... • present but had not sought to renew his exemption from the rule

_ throughout the 1990s. 4 In 1999, the ASAC directed Smith to renew this

•

•.request, but•Smith was again granted a blanket exemption from the rule

requiring that two agents must witness asset payments, without any

....._i....questions concerning his need for the exemption. Although we tbun.d that

•__ Smith did occasionally have other agents witness payments to Leung, most

_ •.• ofthe• time he met her•alone when paying her.

,_,_y

• _:_}_;Inlate September 1998, two years into Smith's tenure as supervisor

of the:China Squad, a source told. the FBI that a Chinese American

employee of a defense contractor met a PRC intelligence officer and

exchanged information for cash. In mid-October 1998, the Los Angeles

Division opened an espionage investigation into the matter, which Smith

supervised. Smith told us that the source'sreporting did not make any

sense and he was frustrated by the investigation. Unbeknownst to anyone,

he briefed Leung and consulted with her concerning all aspects of the

investigation.

Tocomplicate matters, another FBI agent in Los Angeles, Who had a

covert role in the espionage investigation, was a childhood friend of the

main subject's spouse. The agent allegedly accessed information about the

investigation without authorization and told the subject he was under

investigation. Tihe agent was placed on administrative leave and. was

eventually fired. She was subsequently charged with a criminal offense and

her case is pending.

4 In 1992, the.. FBI amended the rule to require SACs to authorize such exemptions.

15
During the late 1990s, the FBI also learned that certain of its

operations had been compromised and that several of its assets ihad been

detained and interrogated •in China. A task force was formed to address

these counterintelligence issues. Among its endeavors, the task force

undertook a review of other sources' files and slated Leung's file for review

because she was one of the FBI's top PRC assets.

In. spring f__,000, FBI Headquarters received reporting from the source

whose information•had predicated the espionage investigation of the

employee of the defense contractor, stating that Leung was an agent of a

PRC intelligence service and had an internal source in the FBI. I'hl_ new

reporting indicated that Leung had disclosed to the PRC the source's

relationship with the FBI as well •as details concerning the espionage

investigation. In.credibly, given that• the information potentially implicated

Smith as Leung's internal source, the Section Chief at FBI Headquarters,

who had been Smith's former ASAC in Los Angeles, immediately ink)rmed _

Smith about the reporting.

• FBI Headquarters decided •to use the task force to investigate the

allegations about Leung and her internal source, •but the FBI found at the

time that the issue of the technical compromises was potentially far more

damaging. The 1:ask force worked extremely slowly, did not identify the

information necessary to resolve the compromise issues, lost the confidence

of the Section Chief, and was eventually dissolved before reaching any

conclusions.

In mid-2000,_ the FBI received another report from the same source as

the spring report indicating that Leung was _in bed with" the Los Angeles

Division of the FBI. Onceagain, Smith was kept informed about•this

reporting. The Section Chief, •who is nowretired, told the OIG that•he did

not suspect Smith and it was unclear whether the source meant the "in bed

with" comment literally. We concluded that by providing Smith with the

source information that possibly implicated Smith, the Section Chief

abdicated his responsibility to ensure an untainted investigation.

In August 2000, the Assistant Director for the Counterintelligence

Division, who is now retired, decided that no investigation should be

conducted based solely on the allegations against Leung. He toM us that he

concluded that the reporting consisted of•"sources pointing fingers at each

other," and he maintained that the issue was _not as clear as the written

reports would indicate." We found his argument was unconvincing because

the source had made a specific allegation against Leung but she had made

no such allegation against the source. Further, while it was appropriate to

question the creclibility of the information, the Assistant Director did not to

take the necessary steps to validate or disprove it. Finally, the allegation

pointed specifically to the Origin of the problem and we believe the FBI

should have at least investigated the allegation.

16
Smith retired from the FBI in November 2000. He was never required

to take a polygraph examination, as was initially suggested by his Los

Angeles supervisors during the summer of 2000. FBI Headquarl:ers officials

told us that that they did not want Smith alerted that he might be the

subject of an investigation by asking him •to take a polygraphexam. We

found this rationale puzzling because FBI Headquarters officials knew that •

Smith had been fully informed about the initial allegation that Leung was a

PRC spy with an internal source in the Los Angeles Division of the FBI and

_ of the later allegation that Leung was "in bed with" the Los Angeles Division

of the FBI. Further, Smith told us that he assumed he would be

• investigated. Smith claimed to us that out of loyalty to the FBI, ihe did not

tell Leung about the reporting even though he knew it was likely they would

both be investigated

The FBI compounded the mistake it had made in keeping Smith

informed of the source reporting by then failing to take steps to resolve the

matter expeditiously. Once Smith retired, the FBI no longer could compel

him to:..take a polygraph exam. Moreover, as discussed below, a formal

inveg-tigation • • _, - of C_ omyth° was not opened until January 2002, some 14 months

i_ii,,i after'.ihe retired from the FBI.

• =.f..,._.,. .,. ..... . ....

.,:,_.: ' We recognized thatduring the late 1990s through 2000, FBI

.....:_-:i_:-Headquarters China program officials were consumed with other high-

...... profile matters such as the campaign finance inyestigation codenamed

• CAMPCON and the Wen.Ho Lee investigation, which involved allegations-

• that a Chinese-American scientist employed at the Los Alamos National

.:.:_;_).i,:Laboratoryin New Mexico stole computer hard drives containing nuclear

.......secrets in order to turn them over to the PRC. However, we believe the FBI

..... still i_ould have prioritized.the investigation of an allegation that the PRC

had 'an internal ,,source in the Los Angeles Division of the FBI.

....

5. The Xnvestigations of Smith and Leung

Late in 2000, management officials in the FBI Headquarters China

Section uncovered the reporting from 1990 indicating that Leung had

disclosed to the PRC the existence and location of the sensitive technical

operation and aspects of the classified FBI counterintelligence program.

These officials told us that they believed the 1990 reporting cons.tituted.

independent "pristine" evidence that I,eung had been providing

unauthorized information to the PRC.

On January 30, 2001, the FBI's China Section prepared a briefing

paper for the FBI's Assistant Director for the Counterintelligence: Division .

encapsulating the 1990 reporting along with the more recent allegations

that Leung was a spy for the PRC. The report recommended that the FBI

open a full counterintelligence investigation on Leung. In response, FBI

Headquarters authorized a full investigation ofLeung. A special squad in

the Los Angeles Divisionwas assigned to conduct the investigation, and all

17
personnel assigned to the matter were required to pass a polygraph

examination before the investigation began.: The investigation did not

actually begin until May 2001, a year after the FBI received credible

information that Leung w_ts spying for the PRC.

We found :no reasonable explanation for the long delay in tully

investigating the allegation that Leung had an internal source in the Los

Angeles FBI office. The responsibility for this delay was mainly attributable

to the Assistant Director of the Counterintelligence Division as the ultimate

decision maker concerning this matter at FBI Headquarters, who decided

that the source's reporting that Leung had an internal source in the Los

Angeles Division did not provide a sufficient basis to investigate :her. It is

particularly puzTling that the Assistant Director did not suspect Smith

because the Assistant Director was overseeing the Robert Hanssen

espionage investigation at the.time. Even after the FBI authorized the full

investigation in early 2001, it took several more months for the investigation

to actually begin because of the need to polygraph the individuals assigned

to it.

At the end of August 2001, the Los Angeles team investigating Leung

issued a preliminary report to FBI Headquarters presenting its view that .'an

espionage relationship between an FBI employee and 5eung is unlik.ely. "s In

early July 2001, the Los-Angeles Division requested that-FBI'Headquarters

obtain approval :to use special techniques to .investigate Leung. Sew_ral

factors, .including the closely compartmented .nature _of the investigation and

the events of September 11,2001,.delayed FBI Headquarters' response to

Los Angeles's request. In December 2001,-theFBIobtained the authority to

use .special techniques for the investigation. Shortly thereafter, the FBI

discovered that the relationship betweenSmith and Leung was more than

friendship. FBI surveillance alsowitnessed numerous meetings between

Smith and Leung at Leung' s house when Leung's family was not athome.

...... In JanuaFy 2002, members of the Los Angeles investigatiw_ team

traveled to FBI Headquarters to brief the Acting Assistant Director for the

Counterintelligence Division on the investigation. The Acting Assistant.

Director briefed the FBI Director, who expressed concern about the ]pace

and scope of the investigation. FBI Headquarters and Los Angeles

personnel pointed to each other for the lack of progress in the investigation.

Following a meeting with Los Angeles and FBI Headquarters representatives,

the Director directed that a full field investigation be opened on ,_mlth. The

Director also appointed Randy Bellows, a prosecutor experienced in FCI

matters, to review the Los Angeles-based investigations and suggest a

course of action.

5 This conclusion was not unique. The Assistant Director, who retired in November

2001, told us that even at that time he believed Leung was the problem, rather than Smith

and Leung.

18
As a result of his review, Bellows recommended that an independent

task force headed by an Inspector-in-Charge be appointed to take control of

the investigations of Leung and Smith and• other counterintelligence issues.

Based on this recommendation, the Director created the task force in

February •2002 to investigate the numerous counterintelligence issues that ..-.,

had surfaced in Los Angeles. The investigation confirmed that Smith and

Leung were engaged in a sexual relationship.

Smith and[ Leung were arrested on April 9, 2003. Smith was charged

withlGross Negligence in Handling Documents Relating to the National

Defense in violation of Title 18, U.S.C. § 793(0. He agreed to cooperate •with

the government and on May 12, 2004, he pleaded guilty to one count of

making •false statements to the FBI during the Personnel •Security Interview

as part•of his background reinvestigation, in violation of 18 U.S.C. § 1001. 6

In July_2005, Smith was sentenced to three years' •probation and a $10,000

fine. i

..

Eeung was charged with Unauthorized Copying of National Defense

Information with Intent to Injure the United States or Benefit a Foreign

Nation,_iin violation of 18 U.S.C. § 793(b). Leung spent three months in jail

and,A8 months in home detention followingher arrest. In early January

2005,_ U.S. District Judge Florence Marie Cooper dismissed thecase against

_ •: Le_ng for prosecutorial misconduct based on language in Smith's p][ea

• agreement that specified that Smith could not share further information

• relating to the case with Leung or her counsel. Judge Cooper found that

this•_language denied Leung's constitutional right to a fair trial because it

obstructed Leung's access to a witness necessary to her defense. The U.S.

•Attor._ey's office appealed Judge Cooper's dismissal of Leung's case to the

Cou_Kof Appeals for the Ninth Circuit.

•.__v

While the appeal was pending, plea negotiations between Leung •and

the U.S. Attorney's office continued concerning income tax issues that had

surfaced during the investigation. On December 16, 2005, Leung pleaded

guilty to one count of lying to the FBI in violation of 18 U.S.C. § 1001 and

one count of filing a false federal tax return in violation of 26 U. °o.C.

§7206(1). 7 That: same day, Leung was sentenced pursuant to the terms of

6 On the 5-year background reinvestigation questionnaire form, Smith asserted that

he was not aware of any current or past circumstances bearing on his suitability for

continued federal employment or his access to classified information. He told the

investigating agent that he was not concealing anything that could be used to• pressure or

coerce him or that could have an adverse impact on his character, judgment,

trustworthiness, or responsibility. This was a false statement because he did• not disclose

his ongoing sexual relationship with Leung.

7 As part of the initial espionage investigation, the FBI had interviewed Leung on

December 11, 2002. During that• interview, Leung lied to•the FBI about her relationship

with Smith, describing herself as nothing more than a good family friend of Smith's, and

19
her plea agreement, which provided that Leung must cooperate in

debriefings and ]prosecutors would recommend that a sentence of three

years' probation., 100 hours of community service, and a $10,000 fine. ••

C. Aftermath

Following the discovery of Smith's •relationship with Leung, the FBI

has taken steps to identify and correct deficiencies in the China Program

and to improve asset handling and vetting Procedures. One of the most

significant changes to the FBI's asset vetting and validation efforts since the

uncovering of Smith and Leung's relationship has been the FBI's creation of

specializedunits which have implemented a three-part validation review

process that consists of a case agent assessment, an analytical production

evaluation, and a counterintelligence review. In the China program, the

longest-running and most problematic assets were given high prioriVy and

reviewed first. By December 2005, the FBI had completed several dozen

comprehensive c,ounterintelligence reviews of PRC assets. Fewer than 10'

percent of those assets reviewed were recommended for closure for control

and reliability issues.

The FBI's !Directorate of Intelligence has also become involved in the

area of asset vetting and validation. It has begun an initiative •to simplify

theadministrative handling of the FBI's human•sources_ and to• ensure that

their bona tides arecontinuously validated. As•of March 2006 the FBI was

making efforts to insure its Validation review process and the Directorate of

Intelligence administrative handling project are compatible.

IV, Conclusion ..........

The FBI's discovery that a• highly regarded veteran FBI age, nt•like

Smith was involved in a long-term, intimate relationship with his asset

raised critical issues regarding the FBI's overall management of its agents

and its counterintelligence assets. During our review, the OIG examined

more than 300,{)00 pages of documents and conducted over 100 interviews

to determine how Smith and Leung were able to deceive the FBI for nearly

•20 years. Our investigation established that while Smith himse]Lf bears

much of theresponsibility for the FBI's failure to detect that Leung 'was

actively working for the PRC to a greater extent than the FBI realizecl,

Smith's managers in Los Angeles and at FBI Headquarters failed to

aggressively question him or to follow up when red flags arose. We

concluded that the FBI's inattention to oversight of Smith and Leung, its

willingness to waive and exempt Smith from complying with the rules, and

supervisory mismanagement allowed Smith to continue his affair with

Leung unimpeded until his retirement. Unfortunately, through Smith,

denying having traveled to the United Kingdom with him in 1992. Leung also failed to

report to the IRS several payments the FBI made to her in 2000. •

20
Leung's access to sensitive FBI investigations and information also

continued until that time.

In the early 1980s, at the beginning of Leung's years as an FBI asset,

Smith performed the routine vetting and validation procedures in place at

the time for assets and their information. Further, Leung passed two

polygraph examinations, one in 1984 and one in 1986. Throughout the

1980s, the FBI valued the information Leung supplied and received positive

feedback about her information from other agencies. As Leung's status

grew in the Chinese community in Los Angeles during the 1980s, so did

Smith's stature as a perceived expert inthe FBI's China Program. As a

result, Smith's managers in Los Angeles readily deferred to him and failed to

adequately address concerns about Leung that began to surface.

Major problems in FBI oversight that we uncovered during our review

included the lack of consistent documentation concerning the many red

flags evident throughout Leung's tenure as an FBI asset, and a failure to

followupto ensure that red flags were resolved. For example, as early as

1987ilth'e FBI learned that Leung told a Chinese official to call her from a

public telephone because she had something urgent to convey tlhat she did

not:want anyone to hear. Despite an initial routine investigation reflected in

:_ Leung's file, neither Smith nor his supervisors documented any resolution of

_ the_matter. Two of the most serious incidents took place in the early 1990s,

ii_f_ just 10 months apart, and indicated that Leung was providing classified

information to tlhe PRC without FBI authorization. Again, the FBI failed to

i_ document the incidents in Leung's file, relied on Smith to resolve the

concerns about Leung, and failed to follow up further to ensure that he had

done_so. Out of an overabundance of trust inhim, Smith's managers relied

on S_ith to address the concerns raised about Leung's activities and failed

to dei_ermine how it was that Leung had obtained the classified iinformation

she disclosed to the PRC. While the FBI had procedures in place, such as

periodic case file reviews and analytic reviews, which could have helped

detect not only Leung's duplicity but also Smith's improper disclosures to

her, the procedures were not followed.

Smith also exploited the inexperience of his supervisors, sometimes

intentionally deceived them, and circumvented or ignored FBI rules with

impunity. Smitlh took advantage of the substantial deference he was

afforded because of his stature in the FBI's China program. Many of

Smith's managers disregarded or exempted Smith from the FBI':s asset

handling rules, policies, and procedures during his operation of Leung. For

example, Smith's managers in Los Angeles did not question his failure to

consistently bring an alternate agent to Leung's debriefings. Further, in

1990 Smith received what amounted to a blanket exemption from tJhe rule

requiring that two agents witness all payments to an asset. Smith's

managers failed to question his need for the continued exemption and the

practice continued until his retirement. Smith continued to handle Leung

21
in 1996 when ' he became a supervisor, an atypical practice in the FBI. His

immediate supervisor failed to conduct the periodic asset file reviews the

FBI requires that supervisors undertake with their subordinates. Taken

together, these exemptions from Usual asset handling practices:removed

mechanisms that could have allowed the FBI to more closely monitor the

asset-handler relationship between Leung and Smith.

By 2000, the FBI had identified compromises within the China

program and in spring 2000 the FBI received reporting that unquestionably

implicated Smith as the source of information Leung passed to the PRC.

Inexplicably, an FBI Headquarters Section Chief immediately intbrmed

Smith about the reporting. Moreover, the FBI did not undertake a full

investigation into the matter for nearly a year. Instead, the FBI allowed _

Smith to retire without being interviewed and polygraphed. Despite the

specificity of the allegations, it took a year for the FBI to begin investigating

Leung, and a year and half to begin investigating Smith.

Prior to the investigations of Leung and Smith, the FBI had undergone

espionage investigations and prosecutions of two of its Special Agents, R. W.

Miller (who had also been assigned to Los Angeles) and Earl Pitts.

Additionally, by 2000 theFBI was conducting a major espionage

investigation soon to result in the arrest of another Special Agent, Robert

Hanssen. Against that backdrop, the failure of the FBI immediately to act

on the potential significance of allegations that pointed directly to Smith is

even more troubling. _

We found that that the performance of several of the supervisors with

oversight for Smith and Leung was deficient. Nearly all of them are now

retired. We therefore make nodisciplinary recommendations concerning

them. However:, the FBI Headquarters Unit Chief responsible for oversight

of Smith and Leung in 1990 and 1991, when two of the most serious

anomalies occurred indicating Leung was providing sensitive information to

the PRC without FBI authorization, is still working for the FBI. FBI

documents establish that he was aware of the two incidents that occurred

just 10 months apart and failed to address the significant concerns raised

by them.-Although we do not believe his actions constitute intentional

misconduct, they raise performance concerns that we believe the FBI should

address.

Finally, .in this report we offer 11 recommendations designed to help

address the systemic issues that enabled Smith and Leung to escape

detection and avoid accountability for so long: We recognize that the FBI"

has developed and implemented many of its own changes to asset handling

and validation since 2002 when Leung and Smith's relationship was

discovered. The FBI hasundertaken several initiatives to identify and

correct deficiencies in the China program. As one example, the FBI made

significant progress towards validating its PRC assets since it established an

asset validation review-process.

22
However, our recommendations go beyond the steps the FBI has

implemented since 2002. Our recommendations include continuing the

new FBI asset walidation review process and devoting sufficient :resources to

•these reviews; creating a new subsection in the asset file for red flags,.

derogatory reporting, anomalies and analyses; requiring a more thorough

periodic background reinvestigation for long-term assets; maintaining a

record of all documents passed to or topics discussed with assets; requiring

alternate case agents to meet with assets on a frequent basis; •limiting the

time an agent can handlean asset; fully implementing its policy regarding

counterintelligence polygraph examinations; and prohibiting blanket

exemptions to the asset handling rules. • We believe that our

recommendations, if implemented, will help the FBI improve further to avoid

in the future the serious problems that occurred in this case.

• ._,_ _.

_,_,

23