http://select.nytimes.com/gst/abstract.html?res=FA0D12FC3A5A0C768EDDAC0894DE404482

May 25, 2006

F.B.I. Missed Many 'Red Flags' on Key Informer, Review Finds

By ERIC LICHTBLAU

A Justice Department review released Wednesday found that the Federal Bureau of Investigation missed numerous ''red flags'' indicating that one of its own informants might be a longtime Chinese spy. The report urged broader changes at the F.B.I. in its handling of informants to prevent security breaches.

As early as 1987, senior officials at the F.B.I. received word that Katrina Leung, a prominent Chinese-American businesswoman in Los Angeles who was also a bureau informant, might have had unauthorized contacts with Chinese officials, according to the review, conducted by the Justice Department inspector general's office.

Despite warning signs through the 1990's, the F.B.I. continued using her as one of its most highly paid informants, paying her a total of $1.7 million, the report found.

It was not until 2001 that the F.B.I. began actively investigating the possibility that Ms. Leung might be spying for China. That investigation also showed that she and her F.B.I. ''handler'' in Los Angeles, a veteran agent named James J. Smith, had been having a secret affair for 18 years.

Mr. Smith, now retired from the F.B.I., pleaded guilty in 2004 to a charge of lying about their affair, and he received a $10,000 fine and probation.

Ms. Leung, meanwhile, originally faced espionage-related charges for the unauthorized possession and copying of classified materials -- which prosecutors charged she had taken surreptitiously from Mr. Smith's briefcase during their visits together.

But a Los Angeles judge threw out the charges last year because of prosecutorial misconduct, and Ms. Leung ultimately agreed to plead guilty to lesser charges of lying to the government and making a false tax return. Like Mr. Smith, she also received probation and a $10,000 fine.

Ms. Leung was never convicted of espionage, and her lawyers, Janet I. Levine and John D. Vandevelde, took issue with many of the Justice Department's findings in a statement Wednesday, saying the espionage suspicions were ''unproven and baseless.''

But the unclassified summary of the inspector general's investigation, including a review of 300,000 pages of intelligence documents, describes Ms. Leung as a ''double agent.'' It found substantial evidence that she had passed sensitive and potentially damaging information to the Chinese and that the F.B.I. had missed ''many red flags.''

In the 1987 episode, for instance, the F.B.I. learned Ms. Leung asked a Chinese official in San Francisco to call her from a pay phone, ''implying that she had something to tell him that she did not want others to hear,'' the review found.

In 1990, the report said, the F.B.I. received information indicating that Ms. Leung had disclosed to Chinese officials the existence of a classified technical operation. And in 1991, the report said, the F.B.I. learned that Ms. Leung was using an alias to communicate with a Chinese handler.

The F.B.I. said in a statement Wednesday that, in response to the Leung case, it had taken numerous steps since 2002 to bolster management of its informants and had made ''significant progress in reforming and strengthening'' the process.

But the inspector general's report said the F.B.I. still needed to go further, in part by making greater use of polygraphs and limiting the time a single agent handles an informant.