Tale of sex and spies leaves FBI with a Chinese puzzle

The tale is worthy of a new Cold War, featuring a glamorous Chinese-American businesswoman and FBI informer codenamed Parlour Maid who is suspected of being a double agent and may have supplied deliberate disinformation on the Chinese leadership to the desks of four American presidents.

To put it mildly, Katrina Leung was a lady of many hats. Arriving from southern China at the age of 15, she became a successful entrepreneur and socialite, and later a donor and fund-raiser for political campaigns in California.

Most importantly, though, she was one of the FBI's most prized sources on matters Chinese for two decades, during which she was paid $1.7m (£1m) for services to national security. Alas, she may have been working for her country of birth all along.

This modern spy story became public on 9 April, when Ms Leung was arrested at her Los Angeles home on charges of improperly copying classified documents. Taken into custody with her was her FBI handler James J ("JJ") Smith, who had won a CIA intelligence prize largely on the strength of the information he had been passed by Ms Leung. The details were deemed precious enough to be worthy of presidential attention.

But the professional relationship gradually became personal, and the two began an affair that would lead to Mr Smith's disgrace.

According to the more lurid accounts, Ms Leung used their trysts to extract from the unsuspecting "JJ" classified documents on FBI counter- espionage activities against China, which she then sent to her bosses at the Ministry of State Security. Nor did Mr Smith seem to have been the only Fed to have fallen for Ms Leung's charms. William Cleveland, a former FBI agent, has resigned from his current job amid accusations he had a lengthy relationship with her when he worked on Chinese counter-intelligence in the bureau's San Francisco office.

But the real mysteries are two: whether Ms Leung channelled to US intelligence deliberate disinformation on the Chinese leadership, with whom she maintained excellent contacts, and where her loyalties ultimately lay.

As the case has progressed, investigators have become convinced that the most serious damage she may have inflicted on America's national security was not the information on the FBI she passed to her Chinese controller (codenamed Mao).

The biggest concern now surrounds the material she channelled to Mr Smith and her other American controllers on the power struggles in Beijing, particularly after the 1989 protests, culminating in the Tiananmen Square massacre, when Washington was desperate to predict policy changes by the Chinese leadership.

In 1991, nine years after Ms Leung was recruited, the FBI had suspicions that her loyalties might be divided. But the American side was prepared to run the risk that much of its network might be compromised, simply because of the presumed value of the material it gained in return.

The case highlights an eternal riddle of the second oldest profession: the moment at which an agent crosses the line to become a double agent – when the information he (or in this case, she) is supplying to one side becomes of less value than the information he is giving his ultimate masters on the other.

The puzzle is compounded by the likelihood that Ms Leung, if she was indeed a double agent for Beijing, provided the FBI with some genuine information, selected titbits sacrificed by Chinese intelligence to enhance her credibility in the eyes of the Americans. That is the dilemma created by Ms Leung, whose information helped Mr Smith to win the National Intelligence Medal of Achievement in 2000, after being nominated by the FBI.

What was real and what was not? The case is a perfect illustration of what James Angleton, the legendary and obsessive CIA hunter of Soviet moles during the real Cold War, once called "the wilderness of mirrors" – in which nothing can be trusted and truth disintegrates into a thousand reflecting fragments, and where the task of distinguishing fact from fiction can drive a counter- intelligence specialist mad.

But there is more. The Los Angeles businesswoman was also involved in the inquiry into Chinese political donations to the Clinton-Gore re-election campaign in 1996. The fascinating point thus arises: did she betray details of the inner and insalubrious workings of US campaign finance to her controllers in Beijing?

Not surprisingly, the case is jangling nerves in Congress. Senator Joe Lieberman, a Democratic candidate to challenge Mr Bush next year, has written to the Bush administration demanding it explores Ms Leung's links to the Republican Party and the Democrats. Three other Senators, one Democrat and two Republicans, are demanding hearings.

Before long both the FBI's Mr Smith and his erstwhile Chinese-American informant may be going to Washington.