ANDREW MITROVICA in Toronto JEFF SALLOT in Ottawa

The Chinese government and Asian criminal gangs have been working together in drug smuggling, nuclear espionage and other criminal activities that constitute a grave threat to Canadian security, a secret study by federal law-enforcement and intelligence analysts says.

"In many ways, China remains one of the greatest ongoing threats to Canada's national security and Canadian industry," the report says.

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The study, titled Chinese Intelligence Services and Triads Financial Links in Canada, was prepared in June, 1997, by as many as five analysts from the Royal Canadian Mounted Police and the Canadian Security Intelligence Service who worked for about two years using classified files from both agencies.

Copies of the original draft were destroyed or kept under lock and key until The Globe and Mail obtained one this week.

The study, known as Project Sidewinder, was considered by some CSIS managers to be so controversial that it was watered down and rewritten before a sanitized version was circulated to other government agencies last year, according to sources familiar with the history of the document.

The Sidewinder report describes an alliance among the Beijing government and its espionage services, Hong Kong tycoons and Chinese criminal gangs known as triads. The ultimate objectives included:

Winning influence with Canadian politicians.

Stealing high-tech secrets.

Laundering money.

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Gaining control of Canadian companies in real estate, media and other sectors.

The RCMP and CSIS files revealed only "the tip of the iceberg," the analysts concluded. They recommended expanding their joint task force to include officials from the Department of Foreign Affairs and International Trade, Immigration Canada and Canada Customs.

That recommendation was never followed. Instead, CSIS managers shelved the 1997 report and dismissed its conclusions as a rumour-laced conspiracy theory, with little factual evidence to support its potentially explosive conclusions.

The Security Intelligence Review Committee, an independent watchdog body, is investigating allegations that the original Sidewinder report was suppressed because of political pressure. The committee is expected to complete its investigation and release the results to Parliament within weeks.

Chinese embassy spokeswoman Qin Xin denied that her government is involved in espionage or criminal activities in Canada or poses any threat to Canadian national security. "These kinds of accusations are totally groundless," she said.

Spokesmen for the RCMP and CSIS would not comment on the main conclusion of the study -- that China poses a grave threat to Canadian national security.

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The Sidewinder study is still classified secret and thus the RCMP can't talk about it, Mountie spokesman Sergeant Andre Guertin said.

CSIS spokesman Dan Lambert said the service does not discuss targets, so it will not confirm or deny whether it considers Chinese activities in Canada a security threat. He did say that CSIS maintains a vigorous counterintelligence program.

Mr. Lambert denied that the original Sidewinder study was watered down and insisted there was no interference from the agency's political bosses.

Both the RCMP and CSIS subjected the 1997 draft to extensive review to make sure the final version, which was produced in 1999, could be supported by facts, he said.

CSIS agents familiar with the 1997 version, however, bristled at Mr. Lambert's version of events and noted that the Liberal government has courted trade and business opportunities with China since coming to office in 1993. Prime Minister Jean Chrétien plans to lead another trade mission to China this year.

The analysts wrote in the foreword of their 23-page study that "this report presents concrete facts, not just ideas or speculation."

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The study notes that an earlier RCMP investigation, code-named Project Sunset, turned up evidence that an international food-services company based in Southern Ontario was involved in smuggling heroin into Canada from Hong Kong. The company's chairman was affiliated with a triad. Company managers met regularly with Chinese trade and military representatives in Canada.

The report also says Ontario Hydro believes it was the victim of theft of nuclear technology "by an individual of Chinese origin." The man sent hours worth of material by fax to a telephone number at a Chinese state science and technology commission.

In two other cases the report cited, employees of Chinese origin at Canadian high-tech companies stole proprietary information and sold it to China.

The report says Chinese intelligence services send agents to Canada as part of business and trade delegations.

Chinese intelligence services have set up "front companies" in Canada solely for espionage purposes, including theft of business secrets, the report says. The companies have regular contacts with the triad gangs.

Drawing on intelligence developed by other Western countries, the analysts say there is a well-established relationship between the Communist government in Beijing and the Hong Kong-based triads.

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More than 200,000 Hong Kong residents immigrated to Canada during the 1990s. The report says the great majority of these immigrants "were legitimate, [but]Canadian authorities detected a significant presence of Chinese organized crime elements." Some eventually acquired Canadian citizenship.

The study notes that a former Canadian citizenship court judge faces 33 fraud and forgery charges in connection with immigration applications by Hong Kong residents. The RCMP laid the charges in May, 1997, but the case has yet to come to trial.

Some Hong Kong investors and mainland Chinese with ties to the Communist Party leadership and Chinese intelligence services came here using the "entrepreneur" and "investor" categories for Canadian immigration, the report says.

Canadian intelligence indicates that some of these people have worked with the Beijing regime to establish companies that are used as cover for criminal and espionage activities, the report says. "This country is an excellent place to invest in companies to launder the profits derived from criminal activities."

Some companies controlled by Hong Kong executives with ties to the Beijing regime have obtained federal government classified contracts, the report says.

The study also says more than 200 major firms in Canada are influenced or owned by triads, tycoons or Chinese national companies.

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The Chinese government buys or sets up a legal company in Canada that in turn buys other companies, the report says, creating "an effective domino effect . . . that acts like a well-spun web or network of strategic points."

Initially, the study says, Chinese intelligence agencies acquired firms in so-called soft-sector firms that attracted little attention from CSIS, but then moved to take control of more sensitive companies in high-tech sectors.

Thus, China is quietly but systematically acquiring sensitive Canadian technology, including nuclear information, and is exerting undue influence over Canada's political environment by assuming control of key portions of Canadian industry, the report insists.

The study says there is Chinese "interference" in politics through political donations. It said the U.S. Federal Bureau of Investigation is investigating about 2,000 companies to determine whether they are being used by the Chinese to funnel illegal campaign contributions to U.S. political parties.

In Canada, the study says, the same pattern can be discerned. Companies believed to be controlled by Chinese interests contributed money to the federal Liberal and Progressive Conservative parties between 1991 and 1994.

Prominent former Canadian politicians have been named to boards of Chinese state-owned corporations, the report adds. The report did not identify the politicians by name.

Beijing has a particular interest in Chinese-language media in Canada, the study says. It notes that one Chinese-language cable TV outlet was the target of a takeover bid by a Hong Kong triad figure in 1992. The bid was withdrawn after federal officials notified the Canadian Radio-television and Telecommunications Commission of the bidder's connections to organized crime.

A Chinese-language film-production studio in Ontario was owned by triad figures who were in regular contact with Chinese diplomats posted here, the report says.

The study notes various real-estate purchases, including hotels, in Toronto, Vancouver and other Canadian cities by the owner of a large south Asian gambling casino. The man was put on a Canadian police watch list 10 years ago because of his alleged involvement in organized crime.