CIA, FBI Plan Reforms After China Spy Reports

Stung by recent allegations of rampant Chinese espionage, officials at the FBI and CIA are moving toward a wholesale restructuring of their counterintelligence operations to plug potential holes in national security, according to sources.

The need for such a move has been under discussion for months, but the recent embarrassment of Chinese spying allegations--including damning reports from high-level White House and congressional panels and the investigation of former Los Alamos nuclear scientist Wen Ho Lee--has spurred a more aggressive tack, intelligence sources said.

Details of a proposed restructuring may be offered in the next week or two at a closed hearing before the Senate Intelligence Committee.

Bureau officials told lawmakers privately last week that they are already planning one key reform: assigning full-time squads of counterintelligence specialists to each national science laboratory to guard against the kinds of security leaks and gaffes that have allegedly plagued the laboratory system in recent years.

It was only five years ago, after CIA agent Aldrich H. Ames was revealed to be one of the most damaging Soviet spies in history, that the FBI assumed broad new powers in counterintelligence after years of turf battles with the CIA.

But in recent discussions, both FBI Director Louis J. Freeh and CIA Director George J. Tenet have concluded that their spy-catching operations must now be restructured again to better reflect changing global realities, including the growing threat of economic espionage, one source said.

Another intelligence source acknowledged that Freeh and Tenet “have been discussing how best to address counterintelligence threats of the future” but added that no final decisions have been made.

As in the Ames case, the internal scrutiny at both agencies focuses partly on whether spy-catchers missed telltale signs of intelligence leaks.

For critics, such a reexamination can’t come soon enough. Lawmakers of both parties complain that the FBI has been slow to recognize its weaknesses, and the growing chorus of detractors is threatening to create a showdown over the direction of the bureau’s counterintelligence efforts.

Rep. Ellen O. Tauscher, a Democrat whose Bay Area district includes two national labs, contends that the problem lies in the FBI’s outdated Cold War mind-set. Agents are still looking for Russian spies dropping messages in hollowed-out rocks--and are failing to recognize the newer, more subtle Chinese methods of spying, she said.

“I’ve been concerned about the FBI coming out of the Cold War for a long time,” said Tauscher, a member of the House Armed Services Committee. “I think it’s a lack of acceptance of the way the world operates now.”

Officials Acknowledge Need for Change

Spokesmen at the FBI and the CIA would not comment on any plans for significant restructuring of their counterintelligence operations, but officials have publicly acknowledged that change may be in order.

Asked about the FBI’s response to Chinese espionage, Freeh said that “with respect to the methodology that is used by that country and its intelligence service, we probably need to be much more flexible and adaptable than we have been in the past, and those are matters that are being actively pursued.”

Atty. Gen. Janet Reno said last month that she and Freeh agreed that Chinese counterintelligence should be “one of our highest priorities, and we’re going to make sure that we’ve got the resources necessary to address it.”

Some members of Congress want to make sure they do.

An appropriation bill in the Senate directs the FBI to reassign “as soon as possible” at least 60 counterintelligence officers to eight key field offices around the country, including Los Angeles, San Francisco and Albuquerque.

As allegations of Chinese espionage have mounted since March, much of the blame has fallen on the Energy Department, which runs the labs, and on Reno for her department’s handling of the Lee case at Los Alamos National Laboratory in New Mexico.

Reno encountered stiff criticism--and some calls for her resignation--for her aides’ refusal to sign off on FBI requests in 1997 to wiretap Lee at Los Alamos. Some, however, suggest that the FBI is largely responsible for bungling the inquiry.

Lee, who worked on nuclear weapon simulations, has not been charged with a crime. But he was fired from his job at Los Alamos in March over alleged security violations, weeks before investigators discovered he had transferred thousands of top-secret files to an unsecured system.

Last week, federal prosecutors in Albuquerque discussed potential charges against Lee with Justice Department officials in Washington, sources said.

As early as 1982, the FBI tape-recorded Lee making what investigators considered suspicious comments to a fellow Taiwanese-born scientist who was suspected of passing classified data to China. In 1996, Lee was a chief suspect in the federal investigation of Beijing’s acquisition of secret details about U.S. nuclear warheads.

One FBI official close to the ongoing Lee investigation said the evidence the bureau presented to the Justice Department in seeking a wiretap was flawed because investigators “didn’t do their homework.” While the official refused to discuss details, he said newly assigned investigators have recently uncovered evidence that should have been known to FBI agents in 1997.

“Clearly there are great lessons to be learned from this case, particularly for the FBI,” the official said. “This will be . . . hotly debated bureau-wide for the next decade or so.”

Indeed, the criticism intensified last week with the release of a report from a White House panel that criticized security at the Energy Department--but also saved some harsh assessments for the FBI.

The panel said a Justice Department task force, created by Reno to review the Lee matter, should answer several troubling questions, including:

* Why didn’t FBI agents realize until recently that Lee signed a series of waivers in 1995 that would have authorized investigators to monitor his computer system at work?

* Did the FBI provide Justice Department officials with all the relevant information in the case and make its concerns known to Reno?

* Why didn’t the FBI, rather than the Energy Department, take control of Lee’s initial polygraph examination in December, an exam often considered a critical tool in breaking suspected espionage cases?

* And, in what the panel said might be the most critical question: Should investigators now be looking at other potential sources of leaks that may have been overlooked?

Former Sen. Warren B. Rudman (R-N.H.), chairman of the White House panel, said FBI investigators may have been too quick to accept the assessment of an Energy Department whistle-blower who fingered Lee--and thus might have let the real spy escape.

“We don’t know where that leak came from,” Rudman said. “It could have come from 100 other places, from 300 or 500 other people.”

The Lee case also has underscored broader concerns about the nature of the FBI’s counterspy efforts and revived an age-old tension in the intelligence community: Should the priority be to protect national security or prosecute the villains?

The Dilemma of How to Handle Spy Suspect

Authorities often must decide whether to simply remove a suspected spy from his position at the first hint of trouble or put him under surveillance, collect evidence that can be used to prosecute him--and risk losing more confidential data.

The answer has shifted over the years. Decades ago, suspected spies were simply considered “PNG”--persona non grata--and shipped home after suspicions first emerged.

But beginning in the Gerald R. Ford and Jimmy Carter administrations, as sentiments and policies changed in favor of prosecuting foreign spies, a new crop of U.S.-bred spies emerged, inspired by money. In 1985, a decade before Ames was busted for making millions from his Soviet handlers, it was the American Walker family who sold off critical Navy secrets and codes.

The government moved aggressively to prosecute the Walkers and a slew of other spies exposed in the 1980s, despite concerns that the high-profile cases might compromise national security.

Some authorities question why Lee, who first came under suspicion in 1982, was allowed to maintain access to top-secret material for nearly 17 more years.

In its report last week, Rudman’s panel concluded: “Striking the proper balance [between protecting national security and prosecuting spies] is never easy. . . . This difficult decision often is made by officials who either are too focused on the investigative details or are too unaware of the details to make a balanced decision.”

Even before the Los Alamos case, some law enforcement officials worried that suspected spies were getting off easy.

In a case similar to the Lee matter, Manhattan Beach scientist Peter Lee (no relation) was convicted in 1997 of passing classified information to the Chinese and lying about a visit he made to China. He was sentenced to one year in a halfway house and three years’ probation.

Federal prosecutors in Los Angeles, backed by an aggressive FBI investigation, wanted to bring the much stronger charge of espionage, sources said, but Justice Department officials nixed the idea.

James Henderson, a former federal prosecutor who defended Peter Lee, said the evidence simply didn’t warrant an espionage charge.

The FBI seemed intent on pressing the case, he said, in part because it didn’t appear to understand the nature of the scientist’s work. He enlisted experts to try to persuade FBI investigators that Peter Lee’s laser fusion specialty had little to do with nuclear physics.

“They questioned this guy for hours and hours and hours about subjects they didn’t even know anything about. . . . I got the feeling they were just trying to justify the tremendous amount of money they had spent on what was probably a misread,” he said.

The problem, said John L. Martin, who headed the Justice Department’s counterintelligence operation throughout the spy-crazed 1980s, is that spy-catching is not a priority.

“They really have to start from scratch. Reno and Freeh have got to make sure that the agents know that Chinese counterintelligence is a priority,” Martin said. “They’ve got to make sure that the small offices that are doing this kind of work are properly staffed with Chinese-speaking agents, agents with counterintelligence experience.”

He blames Freeh for letting key counterintelligence people go when he took over the FBI in 1993. And he faults Reno for giving short shrift to counterintelligence and devoting more resources to matters best left to local authorities, such as the search for a conspiracy link in the recent wave of violence at abortion clinics.

“The conspiracy that they didn’t find,” Martin said, “was right under their nose with the Chinese.”

Times staff writer Bob Drogin contributed to this story.