Editor: Cliff Kincaid Associate Editor: Notra Trulock
  2003 Report # 20 October 17, 2003  

CHINAGATE - THE SCANDAL DEEPENS

 THIS ISSUE:
  • The Greatest Espionage Threat
  • Friends In High Places
  • A New FBI Recruit
  • Modern Day Mata Hari
  • Love Triangle
  • Lax Bureau Management
  • A Damage Assessment
  •  What You Can Do
  • CLIFF'S NOTES
  • Before 9/11, China was thought by many to represent the most significant strategic challenge to the U.S. in the coming decades. Pentagon studies recommended a shift in military strategy and force development away from Europe to a focus on Asia. Congressional reports warned of threats from Chinese espionage to U.S. science and technology. Early in the Bush administration, some Defense Department officials referred to China as a "strategic competitor" to contrast their views with those of the Clinton administration. Chinese truculence in the aftermath of the force-down of a Navy spy plane in April 2001 seemed to reinforce the view of China as a potential adversary.

    But after 9/11, worries about China appear to have evaporated. The Bush administration seems to believe that China's support in the war on international terrorism outweighs concerns about proliferation, human rights, or espionage.

    More recently, the administration has staked its hopes of avoiding a nuclear crisis on the Korean peninsula on China. Secretary of State Colin Powell declared in September, "I would submit U.S. relations with China are the best they have been since President Nixon's first visit." This was only a few days before China blamed the U.S. for the breakdown of the "six-party" talks on North Korea's nuclear program.

    Powell's rosy view of China has attracted favorable attention in the past from China's Communist media. The Chinese Communist People's Daily had highlighted Powell's comments, made in the July 14, 2001 Washington Post, that, "We're not working on converting China to an enemy. We do not need another Soviet Union for an enemy in order to give a sense of purpose. We want more friends, people we can work with." The People's Daily also reported that Powell "dismissed China's military threat ballyhooed by some conservative politicians in America."

    The administration's China policy, as articulated by Powell, is far more questionable than anything it has done on Iraq. But it doesn't attract the same kind of media attention or interest. There are few indications that China has changed or modified behavior that gave rise to our pre-9/11 worries. A recent Pentagon study shows that Beijing has continued to modernize its military, especially in the areas of ballistic missiles and what it terms asymmetric warfare. Similarly, China has continued efforts to strengthen its strategic nuclear deterrent. In 1999, the U.S. intelligence community publicly stated that China's modernization programs had benefited from U.S. technologies "gained through espionage." Curiously, more recent declassified intelligence assessments have dropped any reference to the military benefits derived from Chinese espionage against the U.S.

    Curious, because Chinese espionage has continued unabated against U.S. defense industries and the national labs. Over the past two years, the press has reported on several cases involving the theft of both defense and commercial secrets by individuals on behalf of Chinese military or economic institutes. A number of these have involved trade secrets and the transfer of technologies, supposedly controlled by export laws, to China. But the Chinese have been equally active against military targets. One recent case involves the theft of classified information on F-16 fighter-aircraft night-combat and command and control systems.

    The Greatest Espionage Threat

    This seems to have finally motivated the FBI to declare China "the greatest espionage threat to the U.S. over the next 10-15 years." Two years ago, Canadian officials came to the conclusion that China posed the greatest espionage threat to Canada. At that time, Canadian officials said that "no one else even comes close" to the Chinese in terms of the threat to Canada's technologies and trade secrets. But the Bureau's handling of a number of recent Chinese espionage cases have left many wondering if the FBI is up to the task.

    Since the early 1980s, in fact, there have been four known major cases involving allegations of Chinese espionage. Three of these involved the theft of U.S. nuclear-weapons secrets and another the theft of classified intelligence information from inside the Central Intelligence Agency. Only once has the Bureau managed to obtain a conviction on charges of spying for China; the other cases ended inconclusively and without a major conviction. Bureau officials now acknowledge that they "performed badly" in the Wen Ho Lee nuclear-espionage case.

    In April 2003, the Bureau made headlines when it revealed the existence of a fifth major case-one that also dated back into the early 1980s. This case involved allegations of the theft of classified FBI documents, the use of a double (possibly triple) agent to introduce disinformation into U.S. decision making, and the possible compromise of dozens of ongoing FBI counterespionage operations. The alleged Chinese agent in question, Katrina Leung, also admitted to carrying on long-running sexual affairs with two key FBI counterespionage officials.

    Media accounts report that Leung was born on the mainland and came to the U.S. via Hong Kong in the late 1960s. She attended Cornell University in Ithaca, NY, and later told the Los Angeles Times that her connections to China date back to this period. She claimed "a lot of friends in China-in the ministry of foreign affairs." She told the Times that she had helped out with the establishment of the new China mission at the United Nations in the early 1970s and that the friends she made during that period later became "big shots" in China.

    Friends In High Places

    In 1981, she moved to Los Angeles along with her husband and became active in the local Chinese-American community. There the Times says that she cultivated "people of influence and power" including an influential Republican philanthropist and former chairman of the Federal Reserve Bank of San Francisco. Leung was particularly "helpful" during the Los Angeles visits of Chinese dignitaries. She claimed connections to Deng Xiao-ping, Jeng Zemin, Zhu Rongji, and other high-level government and party officials.

    The Times says that she also "boasted about her friendships" with prominent California politicians. Several sources indicate that Leung made substantial contributions to Republicans in California. By one account, she donated more than $27,000 to California Republicans, but she also supported Democrats.

    A New FBI Recruit

    Court documents indicate that shortly after her arrival in Los Angeles, she went onto the FBI's payroll. She had apparently persuaded the Bureau that she had important contacts in the Chinese Ministry of State Security (MSS), Beijing's main spy agency. Just how she came by these "contacts" has remained murky. William Triplett, writing in The American Spectator, speculated that she has a close relative in the MSS or that she was herself an MSS agent. The FBI assigned her a cover name-"Parlor Maid"-and a handler, FBI Special Agent J.J. Smith, who reportedly had initially recruited Leung in 1982. By 2002, she claimed to have had more than 2,100 contacts with Chinese officials and also to have the phone numbers of high-ranking Chinese officials in her Rolodex.

    These documents refer to Leung's FBI tasking simply as "providing information regarding the People's Republic of China." Triplett thinks that her target was the MSS. In statements released after her arrest, her lawyers claimed that the Bureau was providing her with "information" that she was then supposed to pass on to the MSS. The Bureau wanted her to "build up trust" with the MSS and use that trust to obtain information, probably on Chinese espionage activities in the U.S. Another defense lawyer told the media that she "provided reliable information from people at the very highest levels of the PRC."

    The New York Times' James Risen and Eric Lichtblau reported in April that information she collected related to "political and diplomatic maneuverings of the Chinese leadership" and also the "inner workings of the MSS." They were also told that her information was considered so valuable that it was provided to every U.S. president from Ronald Reagan to George W. Bush.

    She was well paid by the Bureau for her efforts. From 1982 to 2002, she would collect nearly $1.7 million in salary and expenses from the FBI. Her handler, Special Agent Smith, was awarded the U.S. Intelligence Community's second highest award, the Medal of Achievement, in 2000 for his work on the Leung case.

    Modern Day Mata Hari

    Except all of this appears to have been a sham. The Bureau now suspects that Leung was actually working for the MSS all along. She had an MSS-assigned cover name "Luo" and a handler cover named "Mao." She would later tell prosecutors that the Chinese government had paid her at least $100,000. The Bureau also found over $500,000 in 16 foreign bank accounts belonging to Leung.

    The Bureau is still trying to learn what the MSS got for its money. An unsealed court affidavit alleges that Leung "surreptitiously" obtained classified documents from Smith and passed these along to the MSS without his knowledge. She is suspected of providing the MSS with the identities of FBI counterintelligence agents and details about FBI counterespionage operations against China. When the Bureau searched her house in 2002, agents found a document related to a long-running Bureau case known as "Royal Tourist." This case involved a Chinese-American scientist, who had worked at both Los Alamos and Livermore National Labs and later at TRW, Inc. In 1997, he admitted passing classified nuclear-weapons data to the Chinese in the mid-1980s; he was also suspected of giving the Chinese information about U.S. Navy "black" programs.

    One of the documents uncovered in the FBI search was the transcript of an audio recording between "Luo" (Leung) and "Mao," her MSS handler. The transcript had been provided to the San Francisco FBI field office in 1991 and set off alarm bells about Leung, since Special Agent Smith was unaware of the meeting and had not authorized Leung to meet with Mao. Retired Bureau counterintelligence experts say this should have been enough to shut down the Parlor Maid operation. It does appear that Leung's unauthorized meeting with the MSS generated considerable activity, both in Los Angeles and at FBI Headquarters in Washington. Smith is known to have flown to D.C. to discuss the incident with the Bureau's top China experts. Although the Bureau now denies it, these sources are certain that this derogatory information about Leung was known at the highest levels within the FBI.

    But it was left to Smith, her recruiter and handler, to deal with Leung. She reportedly refused to take a polygraph, but Smith then told his supervisors that she had taken the test and passed it. Why did Smith cover up Leung's unauthorized contacts with the MSS and lie to his colleagues and supervisors about the polygraph?

    Love Triangle

    Probably because Smith and Leung were having a long-running sexual affair. Smith initially denied this, but the Bureau had recorded Smith and Leung having sexual relations in a Los Angeles hotel in November 2002. When he was confronted with this evidence, he admitted the affair and told the Bureau that he had also met Leung on trips to Hong Kong and London. Leung would later also admit to the affair and told agents that it had begun in the early eighties, a "very long time ago."

    But the Bureau also learned that Smith was not the only agent romantically involved with Leung. During an FBI interrogation, retired agent William Cleveland also admitted to having a long-running affair with Leung. Cleveland had worked out of the San Francisco FBI Field Office and was widely acknowledged to be one of the Bureau's foremost experts on Chinese espionage operations. He finally admitted that his involvement with Leung ran from 1988 to 1993, when he retired from the Bureau. Cleveland then went to Livermore National Lab, outside of San Francisco, where he set up and ran the lab's counter-intelligence program. Inexplicably, Cleveland admitted that he had renewed his relationship with Leung in 1997.

    What this means, of course, is that Leung was having sexual relations, simultaneously, with two of the Bureau's foremost experts on Chinese espionage. Both had obtained supervisory positions in their offices, where they would have had access to information on most, if not all, Bureau counterespionage operations against China. Cleveland, for example, had run the Bureau's Tiger Trap case, which involved the suspected theft of U.S. nuclear secrets by a Livermore scientist in the early 1980s. It was during the Tiger Trap case that Los Alamos scientist Wen Ho Lee first came to the attention of the FBI.

    Lax Bureau Management

    Cleveland was also involved in the Royal Tourist case, which was wrapping up in 1997 just when Cleveland admitted renewing his relationship with Leung. Both the Tiger Trap and Royal Tourist case had highly unsatisfactory endings; the Tiger Trap suspect was never indicted and was finally allowed to resign from Livermore. Both Royal Tourist and, later, Wen Ho Lee, got off with little more than a slap on the wrist. The Royal Tourist suspect got a year in a halfway house in Anaheim, California, and Lee with time already served.

    As in the case of FBI spy Robert Hanssen, the Bureau violated many of its own rules in the Parlor Maid case. For example, Bureau assets like Leung are supposed to be assigned two handlers, but Smith ran the case alone. Likewise, when these assets are paid, two agents are supposed to be present, but Smith handled this by himself. Information the Bureau authorized to be passed along to foreign intelligence services is supposed to be thoroughly vetted. But Smith was allowed to decide for himself what to provide Leung. After he assumed supervisory duties in the LA Field Office, he was supposed to turn Leung over to a street agent, but continued to handle the case himself.

    Like Hanssen, Smith also violated Bureau regulations regarding the handling of classified information. He took Top Secret documents out of the office and kept them overnight. He permitted Leung to access these documents in his briefcase "surreptitiously" during meetings at her house. She later produced photocopies of several such documents and told the FBI she had made notes on other classified documents. She said she had later passed these along to her MSS handler. Smith also made extensive notes of his meetings with Leung, which he kept in his home and failed to turn in when he retired.

    Obviously, neither agent reported his affair with Leung, as required. Like Hanssen, neither agent was ever polygraphed during their FBI careers. The Bureau conducted only one security reinvestigation during Hanssen's 25-year career; it is unknown how often Smith or Cleveland underwent such scrutiny. Bureau officials promised to tighten up after the case broke into the media.

    A Damage Assessment

    At first glance, the damage does not appear to be as bad as in the CIA Aldrich Ames case or the Hanssen case, in which lives of Russians spying for the U.S. were lost. But FBI officials told Congress that "every major Chinese counterintelligence case over the last 20 years is potentially compromised, including those involving espionage, technology thefts and alleged efforts by the Chinese government to influence the 1996 presidential campaign." Other officials said that everything Leung had provided the Bureau is now suspect and worry that Leung was part of a Chinese disinformation campaign targeted against U.S. decision-making at the highest levels. And the Bureau has alluded to the compromise of "various electronic surveillance operations" against the Chinese.

    Bureau officials also suspect that Leung may have compromised the Chinese campaign finance investigation. Agent Smith was Johnny Chung's case officer. Chung was subject to death threats and threats against his family. At the time, Smith suspected the Justice Department of leaks, but now Bureau officials wonder if Leung passed along information on Chung. Similarly, Leung initially defended California businessman Ted Sioeng, who gave $400,000 to the Democratic National Committee and $150,000 to Republicans in 1995-96. Half of that money was wired from bank accounts in Hong Kong and many believe that the money had come from the government of China. Sioeng fled the country and Leung was tasked to lure him back to the U.S. in 1997. He became suspicious, however, and refused to return. The Bureau now wonders if Leung tipped him off. Among the FBI documents found in her possession was a 1997 FBI report on "Chinese fugitives."

    These revelations led even the Washington Post editorial page to wonder if the long-running Lueng-Smith-Cleveland connections account-ed for the inconclusive and frustrating conclusions to these and other high-profile Chinese espionage cases. Smith was indicted on charges of gross negligence and wire fraud. Leung was charged with copying classified documents for the benefit of a foreign nation and unauthorized possession of classified documents. Neither was indicted on espionage charges.

    Lawyers for the two are employing the same techniques that freed Wen Ho Lee: allegations of racism; charges that their clients are scapegoats for the FBI's mistakes: and, gray mail. This involves the defense's claim that their clients cannot get a fair trial without access to classified information. The government is loath to share such information with the defendants or to permit its introduction into an open courtroom.

    Look for a plea bargain that permits both defendants to avoid any serious jail time. For their part, Bureau officials claim that all of the lapses in management and oversight that permitted the two to operate for so long have been fixed. It will be another frustrating and inconclusive end to a Chinese espionage case.

    What You Can Do

    Send the enclosed cards or cards and letters of your own choosing to Roger Robinson, chairman of the U.S.-China Economic and Security Review Committee; Leonard Downie Jr., executive editor of the Washington Post; and Terry McAuliffe, chairman of the Democratic National Committee..

    CLIFF'S NOTES By Cliff Kincaid

    THIS AIM REPORT DEALS WITH A REAL SCANDAL-CHINESE ESPIONAGE operations. Energy Secretary Spencer Abraham has been lobbying for increased funding for low-yield and earth-penetrating nuclear weapons. But I recently told him that he has to make sure that the American taxpayers don't fund more weapons that end up in the Chinese arsenal. He insisted he is on top of the security problem. But China's assault is mutifaceted. The official U.S.-China Economic and Security Review Commission has held a hearing on how China's currency, which is pegged to the dollar, is undervalued by as much as 40 percent, amounting to a major subsidy for Chinese exporters. The result is the loss of U.S. manufacturing jobs. We suggest sending a postcard to commission chairman Roger Robinson asking for hearings into the espionage problem. In another damaging scandal, U.S. Army chaplain Capt. James J. Yee, a Chinese-American who converted to Islam, spent time in Syria, and ministered to suspected terrorists being held at Guantanamo Bay, Cuba, has been arrested and is under suspicion for facilitating terrorist activities. Senior Airman Ahmad al Halabi, a translator at the base, was also arrested and charged with espionage and aiding the enemy. Other arrests are predicted. It looks like the enemy has infiltrated our own armed forces. We are in terrible trouble.

    THE BUSH ADMINISTRATION'S CHINA POLICY IS MYSTIFYING. WE HAVE RECENTLY learned from Jane's Defense Weekly that China almost certainly gained access to classified information on the Navy spy plane downed by China in 2001. But the administration continues business as usual.

    PRESIDENT BUSH'S DENIAL OF A LINK BETWEEN SADDAM AND 9/11 WAS EQUALLY shocking. We have documented this link, and Richard Miniter's new book, Losing Bin Laden, has several pages on it. He notes that al Qaeda was trained at Iraq's Salman Pak facility to hijack planes with knives. Vice President Cheney has observed that a participant in the 1993 World Trade Center attack fled to Baghdad. USA Today says that intelligence documents discovered in Iraq confirm that he was given safe haven and funding by Saddam. There's also some evidence that Saddam and/or al Qaeda were behind the Oklahoma City bombing.

    THE COMMUNIST PARTY USA, WHICH PRAISES "SOCIALIST CHINA," HAS PRODUCED A booklet outlining a political strategy of collaborating with the Democratic Party and its special interest groups in an "All People's Front." It declares that a Democratic Party victory in 2004 "will create a much more favorable political terrain on which the developing all-people's front can fight." The report identifies the "new forces" in this coalition as Mexican-Americans, immigrants, anti-globalization activists and environmentalists. Only one Democratic Party presidential candidate, Senator Joseph Lieberman, is deemed unacceptable to the Communists.

    THE CPUSA DOCUMENT WAS WRITTEN BEFORE WESLEY CLARK, A FAVORITE OF THE Clintons, moved to the front of the Democratic field, even tying Bush in one poll. Clark's claim to fame was running Bill Clinton's illegal war, which bypassed Congress and the U.N., on behalf of the Muslim terrorist Kosovo Liberation Army. Professor Raju G.C. Thomas, editor of the new book, Yugoslavia Unraveled: Sovereignty, Self-Determination, Intervention (Lexington Books), says Clark directed NATO to attack civilian targets in order to demoralize the Serbian population into submission. The continued deployment of U.S. troops in Kosovo is one reason why some say the U.S. doesn't have more troops in Iraq. Rather than pull our troops out of Bosnia and Kosovo, as he promised to do, President Bush has returned to the U.N. for help. He should watch the film, "And the U.N. Came," about how U.N. peacekeepers brought AIDS to Cambodia.

    THE CPUSA DOCUMENT IDENTIFIES A "TURNING POINT" IN THE EVOLUTION OF THEIR "broad front" as being the election of admitted socialist John Sweeney as president of the AFL-CIO. Sweeney's election provided the Communists an opportunity to work with other groups on the left sympathetic to the Democratic Party. CPUSA members are said to have participated in recent conferences sponsored by the Campaign for America's Future, Jesse Jackson's Rainbow/PUSH, the Coalition of Black Trade Unionists, Jobs with Justice, United for Peace and Justice, Win Without War, and "a number of international unions." It says that conferences by the NAACP and National Organization for Women should also provide opportunities for Communist involvement and organizing. Domestically, CPUSA priorities include increasing labor-union power, more rights for immigrants, expanding affirmative action, abortion rights, homosexual rights, and more federal welfare spending. Internationally, the party demands a U.S. withdrawal from Iraq, cuts in military spending, and more support for the United Nations. We suggest sending a postcard to Democratic chairman Terry McAuliffe, asking him to disavow the Communist support.

    THE PARTNERSHIP FOR AMERICA'S FAMILIES, A GROUP LINKED TO THE AFL-CIO, IS BE-coming part of an organization called Americans Coming Together (ACT), which is being funded by billionaire financial manipulator (and drug legalization proponent) George Soros to the tune of $75 million for the purpose of defeating Bush and his Republican allies in Congress. Steve Rosenthal, a former political director for the AFL-CIO, is serving as CEO of ACT.

    IT JUST SO HAPPENS THAT WESLEY CLARK PRAISED SOROS IN A JUNE 5 SPEECH TO THE Carnegie Council on Ethics and International Affairs, saying he went into investment banking because he wanted to "emulate George Soros." Clark worked for Stephens, Inc., the Little Rock investment firm whose Washington, D.C. office was used by John Huang at the Commerce Department under President Clinton to send and receive messages and faxes. Huang, who had worked for the Lippo group, was linked to more than $1 million in questionable contributions to the Democratic Party. Lippo was a major business partner with China Resources, a company owned by Beijing.

    WESLEY CLARK MAY HAVE SOME EXPLAINING OF HIS OWN TO DO. WHILE RUNNING FOR president, he is staying on the board of Acxiom, a Little Rock firm which compiles databases and markets customer-database software. Acxiom is reported to be working with the controversial "Total Information Awareness" program of the Defense Advanced Research Projects Agency of the Pentagon to develop anti-terrorist screening programs. Critics say such programs violate privacy.

    HOPING TO CREATE THE PERCEPTION THAT THE AMERICAN PEOPLE FAVOR A U.S. WITHDRAWAL from Iraq, two leading "anti-war" groups, International ANSWER and United for Peace and Justice, have joined forces to stage an October 25 "March for an end to the occupation of Iraq" in Washington, D.C. Their aim is to turn the country over to the Islamic terrorists. If the past is any guide, the major media will largely ignore the Communist nature of these "anti-war" organizations. These groups manage to attract many tens of thousands of people to their demonstrations because they conceal the Communist role in their organizations and, with the help of the major media, largely succeed. When we asked Washington Post publisher Bo Jones about his paper's concealment of the Communist role in the protests earlier this year, he said most of the complaints were from those who wanted to see the demonstrations get even more favorable publicity. That's his excuse for ignoring the facts. We must not let the media cover for the Communists again. We suggest sending a postcard to Post executive editor Leonard Downie Jr., asking him for accurate coverage of the Communist role.

    BILL O'REILLY DID IT AGAIN, ON SEPTEMBER 23, SMEARING POPULAR CONSERVATIVE author Ann Coulter by claiming she demonizes people in the same way that liberal Al Franken does. O'Reilly must still be smarting over the fact that Coulter exposed his lack of knowledge on the subject of Joe McCarthy. O'Reilly claimed McCarthy had demonized Dalton Trumbo when Coulter noted that McCarthy had nothing to do with his case. Trumbo, a witness before a House panel, was a Communist who deserved to be demonized.


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