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

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## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** June 10, 1999
- **Citation:** 64 FR 31289

## Text

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
register an applicant to import or export a list I chemical unless the
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:
(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.
(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.
Accordingly, the Deputy Administrator of the Drug Enforcement
Administration, pursuant to the authority vested in him by 21 U.S.C.
823 and 824 and 28 CFR 0.100(b) and 0.104, hereby orders that the
applications for registration as an importer and a distributor of
various listed chemicals, submitted by Alfred Khalily, Inc., d.b.a.
Alfa Chemical, be, and they hereby are, granted subject to the above
described conditions. This order is effective upon issuance of the DEA
Certificates of Registration, but not later than July 12, 1999.

Dated: June 1, 1999.
Donnie R. Marshall,
Deputy Administrator.
[FR Doc. 99-14650 Filed 6-9-99; 8:45 am]
BILLING CODE 4410-09-M

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-14650. Public record. Not legal advice.