Spy’s Close Ties Noted

Officials at the FBI, including those at headquarters in Washington, were aware of an especially close relationship between once-prized spy Katrina Leung and her FBI handler, and allowed at least one departure from FBI policy designed to protect the integrity of the bureau’s counterespionage system.

A source close to the investigation said officials were aware for years that Agent James J. Smith would meet with Leung to pay her in person, despite a policy that normally requires the presence of two agents at such meetings, in part to discourage theft.

Top FBI brass were willing to make the accommodation because Leung, whose code name was Parlor Maid, was a particularly valuable “asset” in the FBI’s effort to spy on the Chinese, said the source, a former Justice Department official.

“She was hot,” he said, “a very integral part of the Chinese program.”

What officials did not know at the time was that Smith and Leung were involved in a long-term sexual relationship, which federal prosecutors allege served as the backdrop for Leung’s secret copying of classified documents and providing them to the Chinese government.

The fact that Smith had a close friendship with Leung was an open secret in the FBI’s Los Angeles field office -- she attended his retirement party wielding a video camera. But the disclosure that officials in the FBI’s Washington headquarters were also aware of aspects of the relationship and appear to have looked the other way may shed new light on the “management lapses” that FBI Director Robert S. Mueller III has said allowed the scandal to occur.

Recently, Mueller dispatched a team of agents from the bureau’s inspections unit in an effort to get to the bottom of the case that resulted in criminal charges being filed against Leung and Smith earlier this month. Some current agents already have been questioned, and none has refused to be interviewed, sources familiar with the investigation said.

The special treatment given to the meetings between Smith and Leung was one of several apparent opportunities to recognize the potential security threat caused by their relationship.

The investigation into Leung and her relationship with Smith began in 2000 when “the China program went to hell,” said the former Justice Department official, who is familiar with some aspects of the Parlor Maid case as it developed in Washington and Los Angeles.

At the time, officials were concerned that the Chinese had discovered various electronic surveillance operations by the United States, according to the former Justice Department official.

As part of the probe into what had gone wrong with the China program, FBI supervisors in Los Angeles questioned Smith about Leung. According to the source, Smith said that Leung was trustworthy and that he was confident she was not responsible for any security breaches. The meeting, which occurred shortly before Smith retired from the FBI in November 2000, was not confrontational because Smith was not suspected of any wrongdoing, the source said.

“J.J. was a very trusted guy,” the source added. “Knowing what we suspect about him now ... I think even if he knew she was a double agent, he thought he was smart enough to manage that.”

Smith, 59, and Leung, 49, were arrested April 9. Leung is accused of having taken classified documents and passing them to the Chinese. She is being held without bail in the Metropolitan Detention Center in downtown Los Angeles. She has denied any wrongdoing. Her lawyers have said she was merely doing what Smith and other FBI officials had asked her to do during a more than 20-year career as an FBI spy during which she was paid $1.7 million.

Smith was charged with gross negligence for allegedly having allowed Leung access to the classified material she is suspected of providing to the Chinese. He is free on $250,000 bond.

How Smith managed for years to sidestep the regulations governing counterintelligence sources remains a source of embarrassment for the FBI because some of his actions were known to top officials, records and interviews show.

Although veteran FBI agents acknowledge that meeting alone with sources occurs more frequently than it should, they expressed surprise that Smith did so repeatedly and with the knowledge of superiors.

“It is one of those things that you don’t want to happen,” an FBI official said. “But we know it did happen here and people, apparently, just looked the other way.”

Said another source: “People understood he had a very close relationship with her ... [and] though it was a technical violation of the rules, I don’t think anyone saw it as the world’s biggest infraction. In hindsight, however, it was.”

Shortly after the 2000 meeting with Smith, three supervisors in the Los Angeles office were summoned to Washington for a meeting with top bureau officials to discuss the developing situation regarding Smith and Leung.

The details of what was discussed in the meeting, how matters were left when it concluded, and what happened next are unclear.

Sheila Horan, who attended the meeting and was then an official with the FBI’s national-security division, declined to comment.

Early last year, Mueller, who had come aboard as FBI director the previous summer, removed Horan from her post; she subsequently left the bureau in a disagreement over the pace of certain China investigations, including a matter that didn’t involve Leung, according to a federal law enforcement source.

Angered that more had not been done in the investigation into the activities of Leung, Mueller contacted the Justice Department in early January 2002, said another source close to the investigation. There, Assistant U.S. Atty. Randy Bellows, who had been appointed a special counsel, launched an internal inquiry and recommended the appointment of an inspector-in-charge. The inspector’s 13-month criminal investigation led to the charges against Smith and Leung.

“Bob [Mueller] was incensed and wanted to take care of this [publicly] before it was leaked to the Hill and it appeared he was trying to cover it up,” said one source close to the investigation. “He wanted to act decisively and I think he has accomplished that,” said the source. Now investigators “are trying to find all the evidence to fit that theory.”

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Times staff writer Richard Schmitt in Washington contributed to this report.