Business leaders and intelligence agencies in Canada and the U.S. are scrambling to determine the damage caused by a prominent Chinese-American socialite who was on the FBI payroll but working for China's spymasters.

By Asian Pacific News Service

It was no secret in the world of Chinese-North American business that Katrina Leung was a player who liked the good life.

Leung, a 49-year-old businesswoman always dressed impeccably, gave lavish parties at her home in San Marino, owned various businesses and property, and frequently flew around the world.

The corporate matchmaker moved with the rich and powerful in the U.S., Canada, Hong Kong and China using her charm to always get on the A-list of major social events.

But Leung, the Chinese-American success story, had another side to her life - a more sinister and steamier side, akin to the famous female agent 'Matahari' who spied for both the French and Germans in WWI.

This week she sits in a California detention centre accused of having have slept her way into the good graces of two FBI agents while stealing secrets for the Chinese government.

As the jet-setting socialite contemplates the future, her past has authorities scrambling to determine just how much damage Leung has done to U.S. intelligence efforts, weapons programs and North American trade secrets.

Sources in Ottawa told The Asian Pacific Post that CSIS, the Canadian spy agency is keeping a close watch on developments south of the border to determine the impact of Leung's espionage activities.

"That woman is likely to have caused irreparable harm to many North American intelligence assets," said an ex-CSIS officer.

"Leung's involvement in Canadian business is being unravelled slowly as many who have come in contact with her are rushing to hide or minimise their relationship."

Katrina at the Hong Kong Forum

Court documents obtained by The Asian Pacific Post show that Leung, who is fluent in Cantonese, Mandarin and English, was paid $1.2 million in 1995 and 1996 for negotiating a deal that allowed Canada's Nortel Telecommunications to do business in China.

Documents filed in court show that Nortel, based in Brampton Ontario hired Leung's company, Merry Glory Ltd., in October, 1990, to help establish a joint venture in China. Nortel was subpoenaed last January and handed over all company documents relating to Leung.

Coincidentally, a Vancouver company run by the Chinese government and used as a cover for its spies goes by a similar name to that of Leung's firm.

The Asian Pacific Post has also learned that Leung may have been using her standing in the Hong Kong Federation of Business Associations Worldwide for her undercover work. Last November, while under surveillance by the FBI, she attended the annual Hong Kong Forum alongside a healthy Canadian delegation comprising some of the country's top business leaders.

Leung is also a close ally of pro-Beijing tycoon Ted Sioeng, who has extensive business interests in Canada.

The Indonesian entrepreneur was the target of an American investigation in 1997 for allegedly working as Beijing's political operative in the United States to gain access to former President Bill Clinton and ex-republican House Speaker Newt Gingrich (Republican-Georgia).

Much of Sioeng's wealth was acquired after the Chinese government granted him the right to export the country's most popular brand of cigarettes - Hongtashan or Red Pagoda Mountain

Although believed to be of Indian ancestry and born in Indonesian, Sioeng considers himself Chinese because he was raised by an ethnic Chinese couple and has always professed undying loyalty to Beijing.

His family now owns hotels, luxury condominiums and other businesses around the globe.

At the height of the investigations into Sioeng, which were triggered by the interception of an alleged plan by Beijing to gain access to North America's top politicians, Katrina Leung, who was at that time the president of the Los Angeles-Guangzhou Sister City Assn., came out vociferously to defend the tycoon.

She described as "nonsense" reports that Sioeng may be working for China.

"If China needed a good agent, why would it turn to someone who doesn't know the United States and doesn't speak English well" asked Leung, who worked with Sioeng on numerous community events in Southern California

She said Sioeng is so wealthy that nobody could afford to hire him.

"If there is one criticism I can make of him, it is that he got himself in the limelight for so long that he attracted . . . rumors and speculation," she said.

At the same time the Sioeng investigation was underway in the U.S., a team of analysts from the RCMP and CSIS were putting the final touches to a secret study in Ottawa.

That study dubbed Sidewinder explored the links between Beijing's intelligence apparatus, Asian tycoons and the Chinese mafia and their impact on Canadian politics and business.

Sidewinder looked at pro-Beijing tycoons like Sioeng, Li Ka-shing, Henry Kuok, T.T. Tsui and Stanley Ho and warned Ottawa of their expanding national influence. It estimated there were 200 companies in Canada that acted as fronts for China's espionage network. But the Chretien-led Liberal government which was making great inroads into China dismissed the report as a rumour laced conspiracy and ostracized the analysts.

The Americans on the other hand continued their investigations, laid charges against China's agents who were illegally donating money to the Clinton-Gore campaign and found a network of spies run by Beijing's top spymaster General Ji-Shengde.

The aging General Ji is now being held in a prison hospital outside Beijing for accepting bribes from China's most wanted man Lai Changxing.

Lai, who has been accused of running a billion dollar smuggling empire, is seeking refugee status in Vancouver with his wife and three children. His appeal to the Federal Court of Canada is to be heard in July.

In an earlier interview with The Asian Pacific Post, Lai laid bare the sinister world of China's global corporate-spy network, one that intelligence officers say has been set up specifically to steal Western technological secrets and to influence Western politicians.

Lai's relationship with General Ji dates back to the early '90s.

Ji is the son of the late Ji Pengfei, whose revolutionary credentials in turn date back to the communist rebellions of the 1930s. Gen. Ji's family connections made him one of China's "princelings" " the offspring of high-ranking cadres who use their connections to enrich themselves and protect others.

"General Ji is a master spy who set up a dangerous network of businessman-spies in North America," said Al Santoli, a senior policy adviser to the Asia Pacific Committee in the U.S. House of Representatives.

"The network was set up to steal military and civilian trade secrets and influence politicians for the communist regime," Santoli said in a telephone interview from Washington, D.C.

Lai agrees. "Yes . . . it is like this . . . quite a few are dispatched overseas on a yearly basis through a regional stream and on a national level," he said.

Lai said he used one of the businessman-spies to help him escape to Canada with his family in August of 1999.

Lai in his application for refugee status in Canada states he was recruited by the Chinese military to spy on Taiwan while he did business in Hong Kong.

Like Katrina Leung, Lai became a leading member of overseas Chinese associations and made political donations while sending secrets back to General Ji's henchmen.

There were others like Johnny Chung, the Chinese-American businessman who took $300,000 US from Gen. Ji to give to the Bill Clinton presidential campaign.

Chung received a five-year suspended prison term for illegal donations to the re-election campaign fund.

The modus operandi of Chinese businessmen-spies like Johnny Chung and Lai Changxing have some in the intelligence field believing that Katrina Leung was also a product of General Ji's spy apparatus.

SLEEPING WITH THE ENEMY

In San Marino, a moneyed old community of mansions east of Los Angeles, Leung has lived for many years with her husband, a biochemist, and her son in a white two-story home with a circular driveway adorned with four stone lions.

Neighbors said Leung had told them she was an Ivy League graduate who worked as an independent business consultant and venture capitalist.

They said the quiet, leafy street regularly filled with evening traffic flowing toward her home for political or diplomatic receptions.

Little did the guests know that the house was wired with secret video cameras and recording devices to spy on them.

Court documents state that the FBI recruited Leung to work as an "asset" in the early 1980s and that she soon began an affair with her handler, former supervisory special agent James J. Smith.

When Smith visited the posh US$1.4 million San Marino home that Leung shared with her husband, Kam, she would allegedly sneak documents out of his briefcase and turn over copies to a Chinese agent.

Smith supposedly learned of her duplicity a decade ago, tipped off by another special agent with whom Leung also had an alleged affair.

The second FBI agent, identified as William Cleveland Jr., resigned from his security position at the Lawrence Livermore National Laboratory on April 10 after acknowledging the affair with Leung. He has not been charged with any crime and is cooperating with the FBI's investigation.

Prosecutors said they found FBI documents at Leung's home including phone directories and a secret 1997 memorandum about Chinese fugitives that contained "national defense information.'

Code-named "Parlor Maid" by the FBI, Leung used her relationship with Smith to gain access to classified documents, including lists of FBI agents and names of agents serving at overseas posts.

Leung is also believed to have passed on information regarding America's plan to bug a Boeing plane being built for the Chinese leadership.

She had a contact code-named "Mao" at China's Ministry of State Security intelligence service, an affidavit said. Leung, in turn, was known to the Chinese by her alias, "Luo."

Authorities suspect Leung's latest spy trip occurred last November, around the time she went to attend the Hong Kong forum.

A covert search of her luggage at Los Angeles International Airport on Nov. 11 revealed six photographs of current and former FBI agents. When she returned Nov. 25, the documents weren't in her luggage, court documents say.

As part of the investigation, investigators also recorded Leung having sex with the married Smith in a hotel room.

Leung was reportedly paid about $1.7million for expenses and for her work as an FBI "asset' over the years.

In court documents she acknowledges stealing documents from the agents she was sleeping with.

According to an affidavit filed by federal prosecutors, Leung admitted to the authorities that she had two bank accounts in Hong Kong under the name Merry Glory and Right Fortune.

It's unclear how she used the alleged money and if it is connected with the thousands that Katrina and Kam Leung have contributed over the years to local, state and federal politicians America.

Leung was arrested and charged on April 9 with obtaining a classified national security document for purposes of aiding a foreign nation. Smith was charged with gross negligence for allowing Leung to obtain the documents.

They could face up to 10 years in prison.

EMBARRASSMENT AND DENIALS

Last weekend as the shockwaves from Leung's arrest continued to reverberate, attorneys for the alleged double agent issued a statement that accuses the FBI of using their client as a scapegoat in order to cover up the misdeeds of its own agents.

The seven-paragraph statement portrays Leung as a patriot who made numerous trips to China at the request of the FBI, only to be targeted by an agency that was "embarrassed" when it discovered that two of its agents were having sexual affairs with Leung.

"The FBI is doing what they have done in other cases of FBI bungling," the statement said. "Their people in Washington are orchestrating things to protect their own. They blame the non-agent and the foreign born, especially the Asian, especially the woman."

The statement was initially issued to the Chinese-language media in Southern California by Leung's family and friends.

The statement, which did not identify any of the family members or friends who wrote it, said the FBI has been "trying to protect itself and shift the blame" since learning that its own agents were "very sloppy."

It claimed one agent had 47 volumes, or 20 years' worth, of secret debriefings at his home.

The statement issued by Leung's family and friends claimed she only received a small salary from the FBI. It said most of the money she received was for reimbursement of expenses, including the costs of many plane tickets to China to meet with government leaders and obtain information for the FBI.

"For 20 years she did what the FBI asked, giving up her career and her personal life...She placed herself and members of her family in personal danger on hundreds of occasions," the statement said.

Earlier last week, a federal judge ruled that Leung must remain in prison pending her trial because her enormous financial assets overseas make her a potential flight risk. The FBI agent charged with her, Smith, 59, posted US$250,000 bail.

At the bail hearing for Leung federal prosecutors said that she and her husband, Kam Leung, had access to at least US$872,000 in bank and retirement accounts in the United States and that the couple might have had millions of dollars in foreign accounts under different names.

United States Assistant Attorney Rebecca Lonergan said Leung could use these assets if she chose to flee the United States. The prosecutor said Leung, a naturalized American citizen, had not reported hundreds of thousands of dollars in overseas earnings on her United States tax returns.

Leung's lawyers argued that the FBI was fully aware of their client's every action and approved them. They said Leung's home was equipped with built-in microphones and video cameras that allowed American agents to spy on her Chinese house guests. "The F.B.I. fed information to her and encouraged her to give it to the People's Republic of China in order to obtain the trust of the P.R.C. and obtain information in return."

Underscoring what prosecutors said was Leung's vast wealth, she and her family had offered to post bail for as much as $2 million in property to secure her release.

THE FALLOUT

As the FBI scrambled to assess the damage from its latest spying scandal, U.S.Justice Department officials said that the alleged betrayal by former Los Angeles counterintelligence agent James J. Smith will accelerate reforms in the bureau's recruitment and handling of informants.

But any definitive conclusions, several FBI officials said, could take months, since Smith's relationship with the woman spanned about 20 years and she had been considered a prized informant.

Moreover, officials said, Smith served as supervisor for a unit whose mission was primarily foreign counterintelligence, but occasionally assisted domestic probes when they involved China issues.

Those investigations included the Democratic Party fund-raising scandal of the late 1990s involving Johnny Chung.

But even as intelligence agents from around North America lamented the scandal's possible effect on their reputations, some insisted no new safeguards or procedures could fully protect any agency from the sort of embarrassment brought on by Leung and Smith.

FBI director Robert Mueller said he has requested internal and Justice Department inspector general reviews "to determine what went wrong, why our safeguards failed to detect this misconduct sooner and where accountability lies."

Brian McAdam, one of the analysts in the Sidewinder project in Canada said the latest Chinese spy scandal is more proof that Ottawa had ulterior motives when it ditched the project.

"We have had several people come out in the open to explain the businessmen-spy network that China has employed in North America to gain influence on the political level.

"The espionage patterns are the same as we predicted in our warnings to Ottawa? But instead of doing something they decided to shut us down."

Katrina Leung

Codename: Parlor Maid

Age: 49 years old:

Also Known As: Man Ying Chan, Wen Ying Chen, Luo Zhongshan

Location: Resides in San Marino, California, married, one son

Affiliations: Southern California Republican political activist

- LA World Affairs Council

-Former leader of the National Association of Chinese Americans

-Former head of the Los Angeles based Guangzhou Sister City Association

-Member of the Hong Kong Federation of Business Associations

Intelligence Career: FBI asset recruited in the early 1980s,

- Paid US$1.7M by FBI

- Allegedly working for Chinese intelligence service Ministry of State Security, alias "Luo"

- Arrested 9 April 2003

- Charged with illegally obtaining secret documents for China