[Federal Register Volume 64, Number 111 (Thursday, June 10, 1999)]
[Notices]
[Pages 31289-31295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14650]


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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 
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