Red Face Over China

By ERIC POOLEY

If you were a Chinese aerospace kingpin looking for an agent to buy influence at the White House and get American rocket technology into your hands, Johnny Chung would not be your first choice for the job--or your second choice or even your third. Yet Chung, the cartoonish Taiwan-born businessman best known for his role in the 1996 Clinton campaign-finance scandals ($366,000 in suspicious contributions; a plea bargain in which he's cooperating with investigators), was being described in Washington last week as the pivot man in a "China Plan" to do just that. For an influence peddler, he employed an unlikely m.o.--a garish, glad-handing personality that repelled those he wanted to seduce, from top White House aides to their interns. "Johnny was a hassle," an intern named Gina Ratliffe told House investigators in a deposition. Chung often showed up at the offices of Hillary Rodham Clinton, where Ratliffe worked in 1995, and whenever he did "people would roll their eyes and say, 'Oh, Johnny is here,'" said Ratliffe. Chung hired Ratliffe, then 21, as an assistant in what he called his "bridge-building" mission between the U.S. and China, promising that she could live in a $3 million Virginia mansion, ride around Washington in a chauffeured town car, even meet Steven Spielberg. But Ratliffe quit after three months and one trip to Beijing, she said, because Chung never made good on his promises. "He was just this big braggart."

Now Chung is having a second moment of infamy, because he has told investigators that he received $300,000 from Liu Chaoying, a top executive at China Aerospace International Holdings (the subsidiary of a huge Chinese satellite-launching outfit), and funneled at least $35,000 of it to the Democratic National Committee. Here's where it gets sticky: after Chung passed illegal money to the D.N.C., Clinton approved the transfer of commercial satellite-launch technology to China--technology that might have helped China improve the accuracy of its long-range ballistic missiles that threaten the U.S.

Suddenly, the campaign-finance scandals seemed to have serious national-security implications. New investigative bodies sprang up in the House and Senate last week as legislators from both parties made grave pronouncements about the apparent security breach. But TIME's examination of the evidence suggests there may be less to the China connection than meets the eye. Investigative sources tell TIME there's no evidence that anyone in the White House knew Chung was funneling money from Chinese sources or that Chung ever lobbied anyone about the transfer of satellite-launch technology. Chung's lawyer, Brian Sun, insists Liu never discussed satellites or waivers with Chung. At least part of their partnership concerned the prosaic business of trading auto parts and telephone equipment.

Chung and Liu met in June 1996 through mutual business contacts in Hong Kong. It was an easy marriage of interests: Chung, 43, the hustler, was always flashing his Clinton photos and looking for deals; Liu, 39, the daughter of a powerful retired general in the People's Liberation Army, was a lieutenant colonel in the P.L.A. As such, she was a sophisticated member of the elite class of Chinese "princelings"--offspring of communist bosses who are often given control of huge trading companies but who sometimes act independently, not necessarily as agents of a putative China Inc. that masterminds all the nation's investment, trade and political activities worldwide. Liu was looking for a foothold in Western markets. When she visited the U.S. in July 1996, Chung introduced her to Clinton at a Los Angeles fund raiser. She and Chung also paid a call on the Securities and Exchange Commission in Washington, a meeting arranged by Massachusetts Senator John Kerry, another recipient of Chung's illegal contributions. On the agenda: the procedure for getting a foreign firm listed on American stock exchanges. Liu had money on her mind, it seems, more than rocket launches. On Aug. 9, Liu and Chung formed Marswell Investment, a Los Angeles corporation that issued 50,000 shares of stock--30,000 for Liu, 20,000 for Chung. And within days, Liu wired $300,000 into Chung's account at a Hong Kong bank, a source familiar with the case told TIME. Most of it was for their new business venture; some went to the D.N.C.

The origin of the funds is murky but important. If the money came from Beijing, its source may have been the P.L.A. or China Aerospace, the outfit that owns Liu's company. That mystery may never be solved because Justice Department investigators do not have access to Chinese banking records. Even the Republican leading the new House investigation into the matter, California Congressman Christopher Cox, says he has no hope of proving that the Liu-Chung payment had anything to do with Clinton's decision to allow an American corporation to send rocket technology to China. "It's going to remain ultimately ambiguous," Cox told TIME. "We will never know."

But if the China connection isn't behind Clinton's decision, what is? The answer may be classic Clinton--another case in which the President decided that the correct global policy dovetailed with his domestic political needs. And what's most surprising is that the risk--massive political embarrassment--was spelled out for him in black-and-white, and he chose to ignore it. Here's what happened:

Clinton's China policy was largely inherited from George Bush. In 1989, as part of a sanctions package meant to punish Beijing for the massacre of students in Tiananmen Square, Senator Al Gore sponsored legislation barring U.S.-made satellites from being launched on Chinese rockets--unless the President declared such a launch to be in the national interest. Under pressure from American corporations desperate to get their satellites into orbit, Bush issued nine such waivers between 1989 and 1992--and Gore denounced him as "an incurable patsy." But after Clinton was elected President, he came under the same pressure from business leaders, who argued that the export controls endangered America's telecommunications primacy. Clinton began signing the same waivers (there have been 11 on his watch). In 1996, an American company, Loral Space & Communications, used a waiver to export a $200 million satellite that was destroyed when the Chinese rocket carrying it into space exploded. In the aftermath, Loral and another firm, Hughes Electronic Corp., gave information to the Chinese that, according to the Pentagon, may have helped China hone its ICBM guidance systems--a possible breach that has been under investigation by the Justice Department for 18 months.

Last February, another Loral waiver request landed on Clinton's desk. The State Department supported the waiver, arguing that it would promote trade with China and enhance America's position as the world telecommunications leader. But Clinton knew that Loral's technology transfer was under investigation. He also knew that Loral's chairman, Bernard Schwartz, was the largest individual donor to the D.N.C. in 1996, responsible for more than $600,000 in soft-money donations. Clinton was warned in a Feb. 18 decision memo that Justice believed that if the Loral investigation ever went to trial, "a jury likely would not convict" the company if it received another presidential waiver: how serious could the breach be if the White House approved yet another technology transfer? By signing the waiver, Clinton would be handing his donor's company what amounted to a get-out-of-jail-free card. Was that an argument for or against the waiver? In Clinton's world, it's hard to tell. But other memos spelled out for Clinton the political "risk" he was taking if he signed.

Clinton signed the waiver; he has called it "routine." But since it was first reported two weeks ago--mixed in with the sensational but apparently tangential Chung-Liu allegations--the embarrassment has mounted beyond anything Clinton could have imagined. A House G.O.P. leader confirmed to TIME that Speaker Newt Gingrich and Senate majority leader Trent Lott have met with committee chairmen to discuss ways to highlight Clinton's embarrassing China dealings in advance of the President's visit to Beijing in June. The strategy appears to be working. Though the China connection may have nothing to do with Clinton's decision to grant the waiver, it is giving Republicans a kind of traction the Lewinsky scandal never did.

Last week the White House was alarmed to discover that the President's ratings in internal polls had "fallen through the floor," as a source put it. And a new TIME-CNN survey reveals that almost half those polled believe the Administration favored China in trade decisions because the Chinese government contributed money to the Democrats. Fifty-eight percent say a new independent counsel should investigate the charge. "I expect we'll have to go through another two weeks of this," says White House press secretary Mike McCurry, who notes that the summertime scandal is now a Washington ritual. "It had to be either this or Monica, and I guess I prefer this."

Cox has already decided to ignore the supposed China link and focus his investigation on one narrow point: Did the Loral waiver damage national security, and if so, how did it happen? He will sort through the contradictory advice Clinton was given--State Department in favor, Justice against--and look for signs that Loral lobbied behind the scenes. Before Clinton signed, the company bombarded the White House with calls and at least one letter, warning the Administration that delay would jeopardize Loral's contract. Schwartz says he never raised the issue with Clinton directly. The company's chief Washington lobbyist, Thomas B. Ross, who was once a spokesman for former National Security Adviser Tony Lake, did send a letter to the current National Security Adviser, Sandy Berger, telling him that Schwartz "had intended to raise the issue with you" at a state dinner for British Prime Minister Tony Blair. "But [he] missed you in the crowd."

While Clinton's decision to sign the waiver reduced the likelihood of criminal prosecution for Loral, such prosecutions have been extremely rare. Teledyne paid a $13 million fine after pleading guilty to shipping cluster-bomb material to Iraq during the Iran-Iraq war, but that was an exceptional case. Even during the cold war, only professional smugglers suffered harsh criminal penalties. And White House officials insist the waiver did not get Loral entirely off the hook. If no criminal charges are brought, the Commerce Department could still impose stiff penalties. But since Clinton always has his eye on Gore's 2000 campaign--and Schwartz remains a go-to guy for the Democrats--nobody expects that to happen. And that little piece of Washington reality is more pungent than anything Johnny Chung and Liu Chaoying ever cooked up.

--Reported by James Carney, Elaine Shannon, Karen Tumulty and Michael Weisskopf/Washington

With reporting by James Carney, Elaine Shannon, Karen Tumulty and Michael Weisskopf/Washington