FBI Knew About Alleged Spy 12 Years Ago

FBI officials were told 12 years ago that alleged double agent Katrina Leung was secretly working for the Chinese, an ABCNEWS investigation has found.

The case of Leung, an American citizen who is charged with giving the Chinese classified information she allegedly took from a longtime lover and retired FBI counterintelligence agent, has left two decades of U.S. intelligence on China in shambles, sources say.

The ex-agent, James J. Smith, 59, was arrested last month and indicted Wednesday on charges of negligence and wire fraud for allegedly letting Leung have access to secrets during the course of a 20-year affair.

A federal grand jury in Los Angeles today handed down a five-count indictment against Leung, 49, charging her with two counts of copying defense-related documents with reason to believe they would be used to the injury of the United States or to benefit a foreign nation and three counts of unauthorized possession of documents relating to the national defense.

Leung's cozy access to top Chinese officials through family ties, including then-Premier Jiang Zemin, led U.S. officials to consider her America's No. 1 spy against China. Her reports went straight to the Oval Office until she was finally unmasked as an alleged double agent working for Beijing.

"It says that the assumptions that our leaders have about China are probably flawed because it's based on information that was fed to them very carefully and tainted," said William Triplett, former China analyst for the CIA.

Intelligence sources say the case also raises questions about why the FBI began its ultimately fruitless investigation of Taiwanese-born American scientist Wen Ho Lee and whether he was a victim of disinformation passed to the FBI.

"They're going to have to look at that completely if they have the stomach for it," Triplett said.

In addition to allegedly feeding suspect reports through former senior China counterintelligence agent Smith, one of the her two FBI handlers and longtime lovers, Leung is also accused of taking top-secret files from Smith's briefcase that revealed FBI undercover agents and secret operations.

In the year 2001, she is believed to have tipped off Beijing that the FBI had planted listening devices in the Chinese premier's Boeing 767 aircraft, sources said.

"It looks we lost everything from China for the last 20 years," Triplett said.

A Pretty Big Warning Flag

Yet top FBI officials at the Washington headquarters, Los Angeles field office and probably the San Francisco field office were told in May 1991 that Leung was secretly working for the Chinese, sources said.

Now-retired FBI agent I.C. Smith says the FBI learned then that Leung had tipped off Chinese authorities about a secret mission he took to China to evaluate embassy security. He says he even took still photos of the Chinese agents he caught following him.

"They knew we were coming before we even left," I.C. Smith said.

Traveling with him to China, it turns out, was the other now-retired FBI agent accused of having a secret sexual relationship with Leung, William Cleveland of San Francisco.

It was clear to him, I.C. Smith said, that at least 12 years ago a pretty big warning flag went up to the FBI.

"There's no doubt about it," he said. "And I viewed that as absolutely a monumental management failure within the FBI that allowed this source to continue to operate."

The FBI tells ABCNEWS it is now investigating what happened 12 years ago — why Leung's alleged secret life as a double agent was not stopped then, when much of the damage could have been prevented.

Attorneys for all the suspects deny the charges.

ABCNEWS' David Scott contributed to this report.