Hidden beneath the waters of Lake Laogai was an underground facility operated by the Dai Li agents and run by the Grand Secretariat, Long Feng. It consisted of several chambers and tunnels, which held prison cells and training facilities for both Dai Li agents and Joo Dees. The chambers also held equipment used to brainwash people who did not adhere to the rules enforced by Long Feng and his agents. Since these rules made it absolutely forbidden to mention the war against the Fire Nation within the city walls, those who did were usually arrested and reeducated using the brainwashing technique.
The secret headquarters was presumed to be destroyed, as discovered by Team Avatar when they tried to convince Earth KingKuei of Long Feng's conspiracy. In an attempt to expose the facilities, Toph's raising of the ground under the lake with earthbending uncovered only a destroyed entrance to the base.
The term Laogai is an abbreviation for Laodong Gaizao, 勞動改造 (simp. 劳动改造), which means "reform through labor", and refers to the use of prison labor in the People's Republic of China. The Laogai are a series of camps where opponents of the Chinese Communist Party are sent to work as slave labor.