Alfred Khalily, Inc. d.b.a. Alfa Chemical; Grant of Restricted Registration

Federal RegisterJun 10, 1999

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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 98-11]

Alfred Khalily, Inc. d.b.a. Alfa Chemical; Grant of Restricted

Registration

On January 8, 1998, the Deputy Assistant Administrator, Office of

Diversion Control, Drug Enforcement Administration (DEA) issued on

Order to Show Cause to Alfred Khalily, Inc., d.b.a. Alfa Chemical

(Respondent) of New York, notifying it of an opportunity to show cause

as to why DEA should not deny its applications for registration as an

importer and as a distributor of List I chemicals, for reason that such

registration would be inconsistent with the public interest as

determined pursuant to 21 U.S.C. 823(h).

Respondent, through counsel, filed a request for a hearing on the

issues raised by the Order to Show Cause. Following prehearing

procedures, a hearing was held in Uniondale, New York on May 19 and 20,

1998, before Administrative Law Judge Gail A. Randall. At the hearing,

both parties called witnesses to testify and introduced documentary

evidence. After the hearing, both parties filed proposed findings of

fact, conclusions of law and argument. On October 30, 1998, Judge

Randall issued her Opinion and Recommended Ruling, recommending that

Respondent's applications be granted subject to two conditions. On

November 23, 1998, the Government filed exceptions to the

Administrative Law Judge's Opinion and Recommended Ruling and on

December 15, 1998, Respondent filed its reply to the Government's

exceptions. Thereafter, on December 16, 1998, Judge Randall transmitted

the record of these proceedings to the Deputy Administrator.

The Deputy Administrator has considered the record in its entirety,

and pursuant to 21 CFR 1316.67, hereby issues his final order based

upon findings of fact and conclusions of law as hereinafter set forth.

The Deputy Administrator adopts, in full, the Opinion and Recommended

Ruling of the Administrative Law Judge, and his adoption is in no

manner diminished by any recitation of facts, issues and conclusions

herein, or of any failure to mention a matter of fact or law.

Alfred Khalily started Respondent in 1990, and is Respondent's

president, only officer, and only employee. In 1991, Respondent merged

with another company named American Roland pursuant to a two-year

contract. This company was involved in the

[[Page 31290]]

importation, brokering, and contract manufacturing of controlled

substances and chemicals. Mr. Khalily was an assistant manager at

American Roland.

In 1992, the president of R.J. Meyer, a Mexican company, visited

American Roland. Mr. Khalily was not a part of that meeting. However he

met R.J. Meyer's president in June of 1993, when Respondent company

split from American Roland and Respondent took over the R.J. Meyer

account.

In October 1994, DEA's Long Island office received information from

DEA's Atlanta office regarding three ``very large shipments'' of

hydriotic acid, a List I chemical, from Ajay Chemical in Georgia to

Respondent in New York. Hydriotic acid can be used in the illegal

manufacture of methamphetamine and it takes at least one gallon of

hydriotic acid to manufacture one kilogram of methamphetamine. Further

investigation revealed two additional shipments of hydriotic acid from

Ajay Chemical to Respondent. These shipments occurred in late December

1993, March 1994, May 1994, July 1994, and October 1994 for a total of

over 11,000 kilograms (kgs.) of hydriotic acid.

On November 8, 1994, DEA personnel visited Respondent's business

which is located in Mr. Khalily's home in a residential area. Mr.

Khalily told a DEA investigator that R.J. Meyer was a regular customer

of Respondent; that Respondent has sold R.J. Meyer pharmaceutical

products other than hydriotic acid in the past; and that R.J. Meyer was

a paint manufacturer that used the hydriotic acid as a disinfectant in

the manufacture of paint. During this visit, Mr. Khalily gave the

investigator a Purchase Authorization Form from R.J. Meyer which

indicated that R.J. Meyer intended to use the hydriotic acid it

purchased from Respondent as a disinfectant and a cleaner of metals.

In July or August 1993, R.J. Meyer's president first contacted Mr.

Khalily regarding the purchase of hydriotic acid. In approximately

1993, R.J. Meyer sent Respondent a purchase order for hydriotic acid.

Mr. Khalily then sent R.J. Meyer a Purchase Authorization Form which

detailed the provisions of the ``Anti-Drug Abuse Act of 1988,''

regarding the reporting of suspicious orders and the need to establish

the identity of the purchaser, and which requested that R.J. Meyer

``please identify the general use you intend for all Hydriotic Acid

purchased from Alfa Chem.'' In response to this request, R.J. Meyer

listed the following proposed uses for the hydriotic acid: agents for

reducing fabrications of iodides, disinfectants, metal finishing,

reducing in the pigment, and petroleum acidification. It was Mr.

Khalily's understanding that R.J. Meyer was engaged in ``contract

manufacturing'' whereby R.J. Meyer would supply a manufacturer with the

``synthesizing path'' and the necessary raw materials, and the

contractor would return the finished product to R.J. Meyer.

Based on price, Respondent selected Ajay Chemicals, Inc. (Ajay), as

the manufacturer to supply this order. Respondent ultimately engaged in

five transactions with R.J. Meyer for hydriotic acid. In general, when

Respondent received an R.J. Meyer purchase order, it would then send a

purchase order to Ajay. Mr. Khalily would call Sky Harbor warehouse,

R.J. Meyer's warehouse, to notify them that a shipment would be

arriving. The shipments were sent by Ajay via Yellow Freight, directly

to Sky Harbor. Ajay paid Yellow Freight and R.J. Meyer paid Sky Harbor.

Ajay would send an invoice to Respondent and Respondent would then send

a check to Ajay. Respondent would send an invoice to R.J. Meyer, who

would in turn send a check to Respondent. Mr. Khalily would call Sky

Harbor to check to see if the shipment was received and would later

call to see if the shipment had been picked up.

Specifically, in December 1993 Respondent sold R.J. Meyer 3,080

kgs. of hydriotic acid; 1,686 kgs. in March 1994; 1,686 kgs. in May

1994; 1,686 kgs. in July 1994; and 6,650 pounds or approximately 3,016

kgs. in October 1994. A review of R.J. Meyer's purchase orders revealed

that shipments were either consigned to Jose Gutierrez, and sometimes

Gus Pimental c/o Sky Harbor Delivery in Tucson, Arizona, or to Jose

Gutierrez c/o Gus Pimentel at a warehouse in Phoenix, Arizona.

Ajay's invoices showed that the hydriotic acid was sold to

Respondent, but was to be shipped to R.J. Meyer at Sky Harbor Delivery

c/o Jose Gutierrez. According to these invoices Respondent was billed

approximately $42,000 for the first shipment, approximately $41,500 for

the last shipment, and $22,086 for the other three shipments.

According to Respondent's invoices, Respondent sold the hydriotic

acid to R.J. Meyer, but it was shipped to Jose Gutierrez at Sky Harbor

Delivery. These shipments were ``FOB Destination,'' which according to

Mr. Khalily means that the shipper's responsibility ends when the

product is delivered to the specified location. Respondent billed R.J.

Meyer approximately $63,000 for the first and last shipments, and

$33,720 for the other three shipments.

Bills of Lading for two of the transactions indicated that the

hydriotic acid was shipped from Ajay and was consigned to R.J. Meyer c/

o Sky Harbor Delivery, Attention: Jose Gutierrez.

Air freight Door to Door receipts showed a transfer fee of $92.75

for the May 1994 shipment, and a transfer fee of $166.25 for the

October 1994 shipment. Sky Harbor billed Respondent for these fees. The

Government alleges that these fees indicate that Respondent rented the

space from Sky Harbor. However, Mr. Khalily testified that R.J. Meyer

leased the space at Sky Harbor for the deliveries. According to Mr.

Khalily, some of the containers of hydriotic acid leaked because there

were not properly sealed by Ajay. Respondent paid the transfer fees to

Sky Harbor so that the warehouse would accept the shipment and place

the containers outside with container material around them so as not to

damage the warehouse facility.

According to Sky Harbor employees, all of the shipments were picked

up by the same Hispanic male in a rental truck and on one or two

occasions, the shipment would be loaded into two trucks because the

cargo was so large.

During the course of the investigation of these shipments, a DEA

investigator questioned an employee of R.J. Meyer who indicated that

Respondent was a ``customer'' of R.J. Meyer and that they had a long-

standing relationship. Regarding these five shipments, the employee

indicated that R.J. Meyer had ``brokered'' the transactions for

Respondent. However, Mr. Khalily acknowledged that while R.J. Meyer

sometimes participated in transactions with Respondent where R.J. Meyer

acted as the broker, R.J. Meyer was the customer in these five

transactions. All of the purchase orders for these transactions

submitted to Respondent by R.J. Meyer indicated that R.J. Meyer was the

customer.

The employee of R.J. Meyer indicated that R.J. Meyer never received

any of the five shipments; the shipments had not come into Mexico; and

that she had no information regarding the final destination of the

shipment. DEA has not been able to determine the disposition of the

shipment after they left the Sky Harbor warehouse. Specifically, DEA

does not know if the shipments ever entered Mexico.

According to a DEA investigator who testified at the hearing in

this matter, Respondent is considered to be the exporter of the

hydriotic acid because it was ``the principal party of interest that is

arranging to have the chemical exported out of the country.'' A review

of DEA's records indicated that no export declarations were filed by

any party to the five transactions at issue.

[[Page 31291]]

Mr. Khalily testified that because the transactions were ``FOB

Destination,'' his responsibilities ended when the shipments were

delivered to the Sky Harbor warehouse in Arizona.

In a letter to DEA dated May 24, 1995, in response to a subpoena

for information regarding these shipments, Mr. Khalily stated that

prior to the shipments, ``The local DEA was notified and they gave

their O.K. The shipment was made directly to our customer. * * * From

our background checking we know our customer has been in the chemical

and pharmaceutical business for the past 30 years.''

At the hearing, Mr. Khalily testified that in his opinion the five

transactions did not involve extraordinary amounts of hydriotic acid.

He believed that the chemical was being used as a disinfectant and

testified that:

[W]hen you are starting a production run of disinfectant you

probably use about maybe 30 or 40 55-gallon drums, approximately, a

regular run, to start the production. Then later on, for other

productions, you just replenish--a little bit less. May about 20 or

30 55-gallon drums is (sic) used to be able to achieve that.

According to Mr. Khalily, an initial start-up of a product run

would require approximately 7,000 to 10,000 pounds of hydriotic acid.

The Government did not present any evidence to dispute Respondent's

explanation for the quantity of hydriotic acid that it sold to R.J.

Meyer.

Mr. Khalily also testified that the method of delivery of these

transactions was not unusual. The same method of delivery was used for

these transactions as was used for other transactions with R.J. Meyer.

According to Mr. Khalily, an unusual method of delivery would include:

``Picking up from you, from your warehouse or picking up from a third

party or drop shipping into some other place which you don't know

about,'' Mr. Khalily explained that a drop ship is when ``you are

sending to a third party which is not part of the transaction.''

At the hearing, Mr. Khalily admitted that he does not know Jose

Gutierrez or Gus Pimentel, however he believed that they were

representatives of R.J. Meyer, who would be responsible for the export

of the hydriotic acid. When told that R.J. Meyer's president indicated

that Jose Gutierrez was not an R.J. Meyer representative, Mr. Khalily

stated that, ``[t]his was the first time I heard of that. All the

purchase orders that they have, they have the name of their

representatives on it.'' Mr. Khalily admitted that he did not know what

happened to the five shipments after they were delivered to Arizona.

In October 1995, Respondent submitted an application to be

registered as an importer of various List I chemicals. The address

listed on the application is also Mr. Khalily's residence. Respondent

submitted a second application in October 1995 to be registered as a

distributor of various List I chemicals. The address on this

application is for a public warehouse where individuals can lease space

to store goods. DEA did not conduct a preregistration investigation at

either of these locations.

Accordingly to Mr. Khalily, the warehouse address listed on the

distributor application is a public bonded warehouse that he has used

for 18 years. He explained that he does not have any specific space

leased, but that we will be charged based on the square footage his

product(s) takes up. In response to a question regarding security at

the warehouse, Mr. Khalily stated:

It is a public, bonded warehouse. United States Customs leave

their goods over there. What other provision [do] I have to have? *

* * I talked to the manager * * * and he would allow me to build a

cage, sort of the same way that the controlled substance are

controlled. There is a fenced in area which two people would have *

* * the key to that cage. And also, it has an alarm and is very much

contained, within the same facility.

Although there are currently no security arrangements specifically

established for Respondent at the warehouse, Mr. Khalily explained that

he would make the necessary arrangements when he anticipated receiving

any regulated substances.

Mr. Khalily testified that listed chemicals have comprised less

than one percent of his business, and that he subsequently ceased

listed chemical transactions with R.J. Meyer because it ``was a kind of

service that I was supplying to them, and it wasn't really our main

business.'' Mr. Khalily further testified that since 1994, his practice

in selling listed chemicals has become to ask which state the customer

is calling from; to ask for the customer's DEA number, the product they

are seeking, and their phone number; and to call DEA in Washington to

double-check the accuracy of the DEA number of the customer.

In arguing against Respondent's registration, the Government

contends that Respondent has not maintained adequate controls against

diversion, as evidenced by the disappearance of over 1,750 gallons of

hydriotic acid. The Government further argues that Respondent violated

21 U.S.C. 841(d)(2), since Respondent knew or had reasonable cause to

believe that the listed chemical it was distributing would be used to

unlawfully manufacture methamphetamine. The Government also contends

that the transactions involved the following regulatory violations by

Respondent: (1) Failure to report an extraordinary quantity of a listed

chemical; (2) failure to identify the other party to the transaction;

(3) failure to keep and maintain records of regulated transactions; and

(4) failure to notify the DEA 15 days in advance of an export of a

listed chemical. The Government notes that Respondent's experience in

the chemical industry made him aware of the regulatory requirements,

but that Respondent ``was more concerned with seeking a profitable

venture rather than ensuring the integrity of the regulated

transactions in which he was involved.''

In arguing in favor of its registration, Respondent alleges that

the term ``extraordinary quantity'' is vague, and that the quantities

involved in the transactions at issue were not extraordinary, and the

transactions were conducted in the normal course of international

commerce, and were ``[f]ar from being a series of secretive and

unreported sales.'' As to the identification requirement, Respondent

argues that R.J. Meyer was the only party Respondent was required to

identify. Respondent also contends that it was not required to file any

export documentation since it was merely acting as a broker and

therefore was not considered a ``regulated person'' at that time.

Respondent points out that its principal officer ``has substantial

experience in the chemical industry and is fully aware of the

regulatory requirements.''

Pursuant to 21 U.S.C. 958(c)(2)(A), ``[t]he Attorney General shall

Attorney General determines that registration of the applicant is

inconsistent with the public interest.'' Pursuant to 21 U.S.C. 823(h),

``[t]he Attorney General shall register an applicant to distribute a

list I chemical unless the Attorney General determines that

registration of the applicant is inconsistent with the public

interest.''

Section 823(h) requires that the following factors be considered in

determining the public interest:

(1) Maintenance by the applicant of effective controls against

diversion of listed chemicals into other than legitimate channels;

(2) Compliance by the applicant with applicable Federal, State, and

local law;

[[Page 31292]]

(3) Any prior conviction record of the applicant under Federal or

State laws relating to controlled substances or to chemicals controlled

under Federal or State law;

(4) Any past experience of the applicant in the manufacture and

distribution of chemicals; and

(5) Such other factors as are relevant to and consistent with the

public health and safety.

These factors are to be considered in the disjunctive; the Deputy

Administrator may properly rely on any one or a combination of these

factors, and give each factor the weight he deems appropriate in

determining whether an application should be denied. See Jacqueline Lee

Pierson, Energy Outlet, 56 FR 14,269 (1999); Henry J. Schwarz, Jr.

M.D., 54 FR 16,422 (1989).

As a preliminary matter, DEA has consistently held that a retail

store operates under the control of its owners, stockholders, or other

employees, and therefore the conduct of these individuals is relevant

in evaluating the fitness of an applicant or registrant for

registration. See, e.g., Rick's Pharmacy, 62 FR 42,595 (1997); Big T

Pharmacy, Inc., 47 FR 51,830 (1982). Since Mr. Khalily is the owner of

Respondent, his conduct is relevant in determining whether or not to

grant Respondent's applications for registration.

Regarding factor one, the Government alleged that the fact that

over 1,750 gallons of a listed chemical disappeared is evidence that

Respondent failed to maintain effective controls against the diversion

of listed chemicals. However, the Government did not provide any

specific argument under this factor to support its allegation. The

Deputy Administrator concludes that Respondent's failure to properly

identify Jose Gutierrez, which will be discussed in more detail under

factor two, clearly shows that Respondent failed to maintain effective

controls against the diversion of listed chemicals.

Pursuant to 21 CFR 1309.71, there are general security requirements

that List I chemical handlers must meet. The Deputy Administrator

agrees with Judge Randall that the Government failed to prove by a

preponderance of the evidence that the physical security at both

locations is inadequate. DEA did not conduct a preregistration

inspection at either location to determine whether or not the

facilities lacked adequate security.

As to factor two, Respondent's compliance with applicable law, it

must first be determined whether Respondent was subject to the laws and

regulations relating to listed chemicals. A ``regulated person''

engaged in a ``regulated transaction'' is subject to various

recordkeeping, reporting and identification requirements. Respondent

was a regulated person pursuant to 21 U.S.C. 802(38), since it

distributed a listed chemical when it caused the hydriotic acid to be

delivered, ``FOB destination'' to Sky Harbor warehouse in Arizona.

Respondent seems to suggest that it was not a regulated person at

the time of the transactions at issue in 1993 and 1994, because it was

acting as a broker, and ``brokers'' were not added to the definition of

``regulated person'' until 1995. However, like Judge Randall, the

Deputy Administrator rejects Respondent's argument. Starting in 1995, a

broker engaged in an international transaction is a regulated person

pursuant to 21 U.S.C. 802(38), (42), and (43). ``International

transaction'' is defined in 21 U.S.C. 802(42) as ``a transaction

involving the shipment of a listed chemical across an international

border (other than a United States border) in which a broker or trader

located in the United States participates.'' Although Respondent

entered into a contract with a Mexican company for hydriotic acid,

these were not ``international transactions'' because Respondent only

arranged for the chemicals to be delivered to Arizona.

Pursuant to 21 U.S.C. 802(39), a sale or distribution of above a

threshold amount of a listed chemical is a regulated transaction. In

1993 and 1994, the threshold for hydriotic acid was 1.7 kgs. Each of

the transactions at issue in this proceeding were above the threshold

amount and were therefore regulated transactions.

The Deputy Administrator concludes that since Respondent was a

regulated person engaged in regulated transactions at the times at

issue in this proceeding, it was subject to various recordkeeping,

reporting and identification requirements.

The Government alleged that Respondent violated these regulatory

requirements by failing to maintain records of these transactions; to

report these transactions to DEA; to properly identify the other party

to the transactions; and to file required export declarations. In

addition, the Government alleged that Respondent violated 21 U.S.C.

824(d)(2) because it knew or had reasonable cause to believe that the

listed chemical that it was distributing would be used to unlawfully

manufacture methamphetamine.

First, the Deputy Administrator agrees with Judge Randall that the

Government has failed to present any evidence regarding the adequacy of

Respondent's records. Therefore, the Government has failed to prove by

a preponderance of the evidence that Respondent violated the

recordkeeping provisions found in 21 U.S.C. 830(a) and 21 CFR 1310.03,

1310.04, and 1310.06.

Next, pursuant to 21 U.S.C. 830(b)(1)(A) and 21 CFR 1310.05(a)(1),

a regulated person is required to report to DEA ``[a]ny regulated

transaction involving an extraordinary quantity of a listed chemical,

an uncommon method of payment or delivery, or any other circumstance

that the regulated person believes may indicate that the listed

chemical will be used in violation of this part.''

The phrase ``extraordinary quantity'' is not defined in the

regulations. Judge Randall noted that ``[b]y merely comparing the

threshold of 1.7 kilograms to each of the five sales, whose quantities

ranged from 1,686 kilograms to 3,080 kilograms, the quantities would

seem to be extraordinary.'' However, Mr. Khalily testified that he did

not believe that these quantities were excessive because R.J. Meyer

indicated that it was using the chemical as a disinfectant for contract

manufacturing and that these amounts were reasonable for the stated

purpose. The Government did not present any evidence at the hearing as

to why it believed that these were extraordinary quantities, nor did it

present any evidence to dispute Mr. Khalily's explanation of the

amounts needed by R.J. Meyer for its stated purpose. The Deputy

Administrator agrees with Judge Randall that ``[g]iven this alternate

explanation for the large amounts of hydriotic acid being shipped, the

lack of evidence to the contrary, and the lack of any further guidance

in the regulations, * * * the quantities alone in these transactions

are not sufficient to trigger the reporting requirements of section

1310.05 as they pertain to the Respondent.''

Likewise the phrase ``uncommon method of payment or delivery'' is

not defined in the regulations. Regarding the method of payment for

these shipments, Respondents was paid by a business account check drawn

on R.J. Meyer's bank and Respondent used a business check to pay Ajay

from its own checking account. The Deputy Administrator agrees with

Judge Randall's conclusion that there is no evidence that there was an

uncommon method of payment for these shipments.

As to the method of delivery, Mr. Khalily testified that the method

of delivery used for these transaction was the same as was used by

Respondent in

[[Page 31293]]

non-listed chemical transactions. He further testified that he believed

that Jose Gutierrez was R.J. Meyer's representative, and the

transaction documents support this interpretation. As Judge Randall

noted, ``[t]hese documents, prepared in 1993 and 1994, weigh heavily in

favor of finding credible Mr. Khalily's interpretation of Mr.

Gutierrez's role in these transactions on behalf of R.J. Meyer.''

However, with the benefit of hindsight, the method of delivery for

these transactions was suspicious. Mr. Gutierrez signed for the

hydriotic acid at Sky Harbor warehouse, and loaded it into a rental

truck. DEA has been unable to determine the whereabouts of the

hydriotic acid after it was picked up by Mr. Guiterrez. But as Judge

Randall noted, ``at the time the transaction[s] arose, Mr. Khalily did

not have the benefit of this hindsight.''

Therefore, the Deputy Administrator agrees with Judge Randall's

conclusion ``that preponderating evidence supports Mr. Khalily's

interpretation of Mr. Gutierrez's relationship to R.J. Meyer * * *.''

However, the Deputy Administrator shares Judge Randall's concern ``that

Mr. Khalily failed to ascertain Mr. Guiterrez's role in the transaction

prior to shipping the listed chemicals to him as the named recipient on

behalf of R.J. Meyer.''

Next, the Government alleged that Respondent failed to properly

identify the other party to the transactions at issue as required by 21

CFR 1310.07(a). While Mr. Khalily and Respondent's predecessor has a

long-standing business relationship with R.J. Meyer, he had never met

Mr. Gutierrez before. Mr. Khalily testified that he assumed that Mr.

Gutierrez was a representative of R.J. Meyer because ``[a]ll purchase

orders that they have, they have the name of their representatives on

it.'' But, pursuant to 21 CFR 1310.07(c), ``[w]hen transacting business

with a new representative of a firm, the regulated person must verify

the claimed agency status of the representative.'' Mr. Khalily failed

to do this. Judge Randall found that ``[b]ased on his own testimony, it

appears that Mr. Khalily merely assumed that Mr. Gutierrez was a

representative of R.J. Meyer, rather than to verify his identity with

R.J. Meyer, prior to shipping the listed chemicals to him.'' Therefore,

the Deputy Administrator agrees with Judge Randall that the

preponderance of the evidence shows that Mr. Khalily failed to properly

identify the other party to the five transactions as required by 21 CFR

1310.07.

As to the Government's allegation that Respondent failed to file

the appropriate export documentation, the Deputy Administrator agrees

with Judge Randall that pursuant to the regulations Respondent was not

required to file such documentation. Pursuant to 21 CFR 1313.21(a)

(1993 & 1994), DEA must be notified at least 15 days in advance of any

export of threshold or above threshold quantities of a listed chemical.

The term ``chemical export'' is defined in 21 CFR 1313.02(a) (1993 &

1994) \1\ as ``transferring ownership or control, or the sending or

taking of threshold quantities of listed chemicals out of the United

States * * *.'' The regulations further define ``chemical exporter'' as

``a regulated person who, as the principal party in interest in the

export transaction, has the power and responsibility for determining

and controlling the sending of the listed chemical out of the United

States.'' 21 CFR 1313.02(b) (1993 & 1994).\2\

---------------------------------------------------------------------------

\1\ This regulation has since been renumbered and can now be

found in 21 CFR 1300.02(5).

\2\ This regulation has since been renumbered and can now be

found in 21 CFR 1300.02(6).

---------------------------------------------------------------------------

While Respondent was selling above threshold quantities of

hydriotic acid to a Mexican company, these sales were ``FOB

Destination'' transactions and therefore Respondent's responsibility

ended when the chemicals were delivered to the warehouse in Arizona.

Respondent did not send or take the listed chemicals out of the United

States, nor was it the ``principal party in interest'' with the power

and control over sending the chemicals out of the United States.

Therefore, it was not responsible for filing any export documentation.

As to factor three, there is no evidence that Respondent or its

owner, Mr. Khalily, has been convicted of any criminal acts related to

controlled substances or listed chemicals.

Regarding Respondent's past experience in the manufacture or

distribution of chemicals, Mr. Khalily has been involved with the

importation, contract manufacturing, and brokering of transactions

involving controlled substances and listed chemicals for a number of

years. As a result, he has been aware of the regulatory requirements

regarding listed chemicals. Nonetheless, Mr. Khalily distributed a

listed chemical on five occasions without properly identifying the

other party to the transaction in violation of the regulations which

allowed over 11,000 kgs. of hydriotic acid to disappear.

As to other factors relevant to the public health and safety, Judge

Randall noted Mr Khalily's failure to take responsibility for his role

in the transactions and his lack of concern regarding the disappearance

of the five shipments. Further, Mr. Khalily did not present adequate

assurances that Respondent will implement better procedures for

properly identifying other patties to listed chemical transactions.

Judge Randall concluded that ``[t]he Government has not proven by a

preponderance of the evidence that the Respondent is conducting five

regulated transactions of hydriotic acid, failed to comply with any

record-keeping or reporting requirements.'' Further, the Government has

failed to prove that Respondent was required to file export documents.

But, the Deputy Administrator agrees with Judge Randall that the

evidence does support the conclusion that Respondent failed to properly

identify Mr. Gutierrez thereby allowing over 11,000 kgs. of a listed

chemical that can be used in the illicit manufacture of methamphetamine

to disappear.

Judge Randall concluded that ``[t]he Government has proven by a

preponderance of the evidence that the Respondent's failure to comply

with identification regulations contributed to the ultimate loss of the

shipments, leading to a greater likelihood that they could have been

diverted to illicit use, the very evil addressed by this regulatory and

statutory scheme.'' Judge Randall also concluded that ``Respondent has

done nothing to assure the DEA that it will act more responsibly in

future transactions.'' Nonetheless, after considering all of the facts

and circumstances of this case, Judge Randall concluded that complete

denial of Respondent's applications is not warranted. However, Judge

Randall further concluded that Respondent's prior conduct warrants

closer monitoring than in other cases.

Therefore, Judge Randall recommended that Respondent's applications

be granted with the following conditions:

(1) The Respondent be required to maintain a log of all listed

chemical transactions he engages in for a period of three years from

the date of issuance of these DEA Certificates of Registration. At a

minimum, the log shall indicate the date that the shipment occurred,

the name and address of all the parties involved in the transaction,

the destination of the shipments, and the name and quantity of the

listed chemical shipped. Upon request by the Special Agent in Charge of

the local DEA Field Division, or his designee, the Respondent shall

submit or otherwise make available his log for inspection.

[[Page 31294]]

(2) For three years from the date of issuance of the DEA

Certificates of Registration, the Respondent shall consent to periodic

inspections at its registered locations by DEA personnel based on a

Notice of Inspection rather than an Administrative Inspection Warrant.

In its exceptions to Judge Randall's Opinion and Recommended

Ruling, the Government argued that the Administrative Law Judge gave

undue weight to Mr. Khalily's testimony that Respondent had no

obligation to report the transactions as a result of the proposed use

for the hydriotic acid. Further, the Government argued that Respondent

had an obligation to report these shipments since they were for

extraordinary quantities and there was an uncommon method of delivery.

Specifically, the Government contended that Respondent's

explanation of the quantities distributed was self-serving, and that

Judge Randall gave too much significance to the intended uses listed on

R.J. Meyer's purchase authorization form. ``The Government believes

that this form, standing alone, is inadequate to prove that the listed

uses were intended, or even valid, uses.'' The Government disagreed

with the Administrative Law Judge's conclusion that mere quantities of

shipments alone are not sufficient to require reporting and that the

method of delivery was reasonable based upon Mr. Khalily's mistaken

impression that Mr. Gutierrez was an agent of R.J. Meyer.

The Government argued that the quantities of these shipments were

extraordinary because they each greatly exceeded the threshold for

hydriotoc acid; ``the physical size of the product shipment was bulky

and large''; and ``the amount of illicit methamphetamine that could

ostensibly be made from this product was immense.'' The Government also

argued that an uncommon method of delivery was used for these shipments

because Mr. Khalily ``did not know the persons to whom he shipped the

[hydriotic acid,] * * * [t]he shipments were picked up by rental truck

* * * [and] [n]o one knows where the [hydriotic acid] went.''

The Government further contended that ``the burden of establishing

whether any given shipment is required to be reported falls heavily

upon the regulated industry.'' In support of its position, the

Government cites to the final rule implementing the chemical Diversion

and Trafficking Act wherein DEA declined to define either

``extraordinary quantity'' or ``uncommon method of delivery'', but

rather stated:

The chemical industry is expected to understand the nature of

its legitimate business transactions and must make informed

decisions as to whether the above terms apply to any of their

transactions.

See 54 FR 31,657,31,659 (1989).

Based upon the record before him, the Deputy Administrator finds

that the Government has not established that the quantities of these

shipments were extraordinary. While these shipments seem large to the

Deputy Administrator, the Respondent's explanation based upon the

intended use of the hydriotic acid for the quantities shipped was

unrebutted by the Government. The Deputy Administrator would like to

have considered evidence of whether R.J. Meyer's intended use for the

hydriotic acid was legitimate and what the usual quantities are in the

industry for the intended use, however no such evidence was presented

by the Government. Therefore, the Deputy Administrator is left with

nothing but Respondent's explanation, and as stated above the industry

is expected to understand the nature of its business. Consequently,

based upon the evidence in the record before him the Deputy

Administrator concludes that Respondent was not required to report

these transactions in light of the quantities shipped.

The Deputy Administrator has considered the Government's contention

that these shipments should have been reported based upon an uncommon

method of delivery. However as stated above, the method of delivery

employed for these transactions was the same as had been employed by

Respondent with R.J. Meyer in previous non-listed chemical

transactions, and based upon the transaction documents, Respondent's

assumption that Mr. Gutierrez was a representative of R.J. Meyer was

not unreasonable.

In its exceptions, the government also disagreed with the

Administrative Law Judge's conclusion that Respondent was not required

to file any export documents. Essentially the Government argued that by

selling hydriotic acid to a Mexican company Respondent was exporting

the chemical, and therefore was responsible for filing the appropriate

documents. However as previously noted, the Deputy Administrator agrees

with Judge Randall that since these were ``FOB Destination''

transactions, Respondent responsibility ended when the shipments were

received at the warehouse in Arizona. Therefore, Respondent did not

meet the definition of a chemical exporter since it did not have ``the

power and responsibility for determining and controlling the sending of

the listed chemical out of the United States.'' 21 CFR 1313.02(b) (1993

& 1994).

Finally, the government took exception to Judge Randall's

conclusion that despite Respondent's failure to properly identify the

other party to these transactions, Respondent's applications should not

be denied. The Government argued that Respondent's failure to determine

the identity of Mr. Gutierrez resulted in the disappearance of over

11,000 kgs. of hydriotic acid which could be used to produce over 1,700

kgs. of methamphetamine. The Government further argued that Respondent

has distanced itself from the transactions; has accepted no culpability

for its actions; and ``thus has not shown that it can be depended upon

to carry out DEA regulations in the future.''

In its response to the Government's exceptions, Respondent

contended that it is not distancing itself from its own conduct,

however it argues that the Government also bears some responsibility

for failing to prevent the listed chemical from disappearing.

Respondent asserted that ``[t]he Government must provide expert

assistance to the chemical industry. It should provide information to

assist the chemical handlers in recognizing potential problem

transactions.'' Specifically, Respondent argued that it would have

benefited from knowing that in 1993, ``the Southwest was the home for

the illegal production of amphetamines and [hydriotic acid] was the

main ingredient.'' In addition, Respondent argued that had they known

of Ajay's concerns regarding the first four of the transactions, ``the

final sale in October 1994 would have occurred.'' According to

Respondent, Mr. Khalily ``believes that he did everything the law

required in 1993 and 1995 and that he should not be held solely

accountable when there were other parties involved in these

transactions, including the DEA, who were equally unable to prevent the

listed chemical from disappearing.''

The Deputy Administrator agrees with Respondent that such

information may have been helpful to Respondent. However, in 1993 and

1994 Respondent was experienced in the handling of listed chemicals and

Mr. Khalily testified that he was familiar with the provisions of the

law relating to listed chemicals. Consequently, he knew that he had to

properly identify the other party to any transaction involving a listed

chemical. While it is true that Respondent and its predecessor had a

long-standing business relationship with R.J. Meyer, he had never

before dealt with Mr. Gutierrez.

[[Page 31295]]

The Deputy Administrator is extremely concerned by Mr. Khalily's

failure to properly identify Mr. Gutierrez and verify whether he was a

representative of R.J. Meyer. This is particularly troubling given that

Mr. Khalily knew that hydriotic acid was a listed chemical; that he had

not seen Mr. Gutierrez's name on previous invoices; and that R.J. Meyer

had not previously purchased hydriotic acid from Respondent. All of

these things combined should have caused Mr. Khalily to recognize the

need to ascertain whether Mr. Gutierrez was in fact a representative of

R.J. Meyer.

Nontheless, the Deputy Administrator agrees with Judge Randall that

denial of Respondent's applications is not warranted in this case.

Although Respondent was clearly not as careful as he should have been

in identifying Mr. Gutierrez, Respondent did follow its normal business

practices regarding these shipments and there has been no other

evidence of any wrongdoing by Respondents. However, chemicals are

designated as listed chemicals because they have the potential to be

used to manufacture dangerous substances. Consequently those who deal

with these chemicals have to be ever vigilant to ensure that they are

not diverted for illegal purposes. Therefore, the Deputy Administrator

agrees with Judge Randall that Respondent's prior conduct warrants that

Respondent should be more closely monitored than other registrants.

The Deputy Administrator agrees with Judge Randall's recommendation

that Respondent's applications be granted with the following

conditions: