Financial Accusations a Subplot in Spy Case

In declaring Katrina Leung a flight risk and ordering her held without bail, a U.S. magistrate expressed concern, not only about her close ties to high-ranking officials in China, but also about the possibility that she might have large sums of money hidden in overseas accounts.

“The problem is, there is much about the defendant’s wherewithal that has not been revealed to the court,” Magistrate Victor B. Kenton observed at a bail hearing for the San Marino businesswoman accused of serving as a Chinese double agent while working as a paid FBI informant for 20 years.

Kenton, citing government affidavits, said Leung had carried out “sophisticated yet deceptive financial transactions involving overseas accounts and trusts.” He questioned whether her stated net worth of nearly $3 million was just “the tip of the iceberg.”

With the spotlight focused on whether Leung was responsible for a serious security breach in the FBI’s counterintelligence program, her financial dealings received little notice. Much of what is known is contained in government affidavits unsealed after she was arrested Feb. 9, along with retired FBI counterintelligence agent James J. Smith, who served as her handler for nearly 20 years. He also allegedly was her lover.

At the hearing, federal prosecutors accused Leung of filing a fraudulent bankruptcy petition for a bookstore she owned in Monterey Park, and of claiming bogus mortgage interest deductions on her income tax returns. Although she has not been charged with those offenses, that could change when a federal jury returns an indictment in the overall case, as it is expected to do this week.

Leung’s lawyers say she is a patriotic American who did what she was told to do by the FBI, including providing the Chinese with certain documents. Defense attorneys Janet Levine and John Vandevelde issued a statement saying, “There is a very obvious and intentional effort underway by the FBI to ‘dirty up’ Katrina Leung with a smoke screen of meaningless financial allegations to obscure the fact that the charge filed by the government -- possessing a classified document with intent to injure the United States -- is completely unfounded.”

Leung, a 49-year-old naturalized U.S. citizen with an MBA from the University of Chicago, is well-connected in China. She once hosted a gala for visiting Chinese President Jiang Zemin.

In 1990, Nortel Networks hired Leung as a consultant to help the Canadian-based telecommunications company establish a joint venture to manufacture and sell switching systems to China. Under terms of the agreement, Merry Glory Ltd., a Hong Kong company controlled by Leung, was to receive 3% of the initial capital investment. Court records show that Leung was paid $1.2 million.

Tina Warren, a Nortel spokeswoman, declined to elaborate on the company’s arrangement with Leung. She said Nortel terminated their relationship in 1996. Nortel was subpoenaed for its records about the deal in January and handed them over to U.S. investigators.

According to the FBI affidavits, Leung deposited the $1.2 million she received from Nortel into the bank account of another Hong Kong company she controls, Right Fortune Ltd., and never declared the income on her U.S. tax returns.

An FBI financial analyst discovered that she then used the money to pay off the mortgage on her $1.4-million home in San Marino. In doing so, however, she made it appear that she had borrowed the money from Right Fortune and fraudulently claimed home mortgage interest deductions on her tax returns for 1998 through 2001, according to the analyst.

During a series of interviews last December, the FBI said, Leung admitted the mortgage interest scam, as well as having received $100,000 from China.

As an FBI informant from 1983 to 2002, Leung received about $521,000 in pay and about $1.2 million in expense reimbursements. But, according to an FBI affidavit, she also failed to report that income.

Leung and her husband, Kam, a biochemist, are also accused of filing a fraudulent Chapter 7 bankruptcy petition in connection with Monterey Books and Stationers, which she owned.

Leung’s lawyers said the FBI failed to disclose that “the bookstore was an FBI operation and all Katrina did was what she was told in order to extricate herself and her family” from a financial problem that the FBI put her in. Referring to the tax fraud allegations, they said that Leung had “acted on the advice of others in these complex international transactions.”

They also took issue with the government’s suggestion that Leung might have millions concealed in a multitude of foreign bank accounts. An FBI affidavit said that, over 20 years, she had 16 accounts in overseas banks, with total balances exceeding $500,000 in recent years.

At the earlier bail hearing, however, Magistrate Kenton said he was troubled by Leung’s lack of candor when questioned about her finances by the court’s pretrial services office, which advises judges on setting bail.

Leung, he noted, first said she was unemployed and depended entirely on her husband for financial support. “Confronted with the fact that her expenses exceeded her income, the defendant then remembered working for a company in China for which she earns $5,000 a month as a consultant,” said Kenton. He did not identify the company.