July 19, 1999
Marriott Residence Inn; Pentagon City, VA

Welcome and Introductory Remarks

Ms. Patricia Good, Chief of the Liaison and Policy Section, opened the meeting and welcomed the participants. She noted that DEA’s Office of Diversion Control deals with two different environments: the controlled substances laws and the chemicals laws. While they do have some similarities, one law is thirty years old and the other is only ten years old and is still evolving. The regulatory process is a two-way process that relies on the valuable expertise of industry. Ms. Good noted that this is the first working committee meeting for handlers of drug products containing List I chemicals. Participant introductions were made and Ms. Good then introduced Mr. William Wolf, Special Assistant to the Deputy Assistant Administrator.

National Methamphetamine Picture

Mr. Wolf reported on national methamphetamine trends. He directed attention to a 1998 U.S. map showing seizures of clandestine methamphetamine laboratories (labs) capable of producing 10 pounds or more.

• These 70 "superlabs" represent 78% of U.S. methamphetamine production capability. Most other labs are tiny; 95% of clandestine labs account for the remaining 22% of production capability.
• Of the 70 superlabs, five superlabs used P2P as the principal precursor and 65 used ephedrine or pseudoephedrine extracted from tablets as their starting material.

These 65 labs and the rogue chemical companies that typically supply them are the major focus of DEA’s investigative resources while the small labs get their tablets largely from legitimate industry. Traffickers "smurf" from legitimate outlets and seek stores that are not compliant. This means that the meeting participants represent that segment of industry on whose voluntary initiatives the Federal government depends for combating 95% of clandestine labs. Mr. Wolf advised that the Federal 24 gram retail sales limit and industry’s voluntary adoption of lower limits on all products, including exempt safe harbor products, have been helpful in limiting large scale methamphetamine production. These efforts, however, have not been sufficient to prevent the continued increase in small (4 ounces or less) clandestine methamphetamine labs.

The continuing expansion of small labs and the spread of the methamphetamine problem from west to east was highlighted by a chart showing a U.S. map for each year from 1993 through 1998. Except for two New England states, every state has experienced the seizure of a clandestine methamphetamine laboratory.

Charts of ephedrine and pseudoephedrine imports from 1990 to 1998 show a significant increase in pseudoephedrine imports since 1995. Mr. Wolf explained that imports over the 450 ton level exceed legitimate needs and have the potential to be diverted to methamphetamine production. Mr. Wolf highlighted some of DEA’s efforts to reduce that excess. In the first five month months of 1999, DEA stopped declared imports of 40.4 metric tons of pseudoephedrine and 19.25 metric tons of ephedrine when there was indication of potential for diversion. Besides using international efforts to block imports into the United States, DEA is targeting rogue domestic distributors. Since February, 1997 DEA has made at least 167 arrests, seized $10 million in assets and 134 million dosage units, preventing over 10,000 pounds of methamphetamine from being produced.

These initiatives have produced positive results. The purity of seized methamphetamine has declined from 57% in 1997 to 27% in the first half of 1999. The most recent Drug Abuse Warning Network (DAWN) data on emergency room episodes shows a significant downturn in 1998. Although these results are welcome, Mr. Wolf cautioned that a similar DAWN downturn in 1995-1996 was short-lived and followed by a significant upturn.

Mr. Wolf stated that legitimate distributors are targeted by traffickers seeking supplies for their clandestine labs. He invited industry’s ideas on how to prevent further diversion.

Diversion Trends

Mr. John Uncapher, Chief of the Domestic Chemical Investigations Unit, presented specific examples of the trends which Mr. Wolf described.

Because pseudoephedrine and ephedrine are more difficult to obtain, clandestine manufacturers are adding cutting agents to methamphetamine. A popular cutting agent is di-methylsulfone (MSM). It is a legitimate product used as a supplement for animal feed. It is diverted from feed and tack shops. Mr. Frank Sapienza, Chief of the Drug and Chemical Evaluation Section, explained that there is no special reason for the use of di-methylsulfone for this purpose, other than that its physical characteristics are similar to those of methamphetamine.

Among the case examples that Mr. Uncapher presented are the following:

• In Utah, pseudoephedrine was purchased in case quantities from retail outlets. The National Association of Convenience Stores reported this case to its members and urged them to be on alert.
• XLI, an Atlanta corporation, was convicted of diverting millions of pseudoephedrine tablets.
• In an Oklahoma case, a pharmacist was indicted for selling 100,000 60-milligram tablets to undercover agents. The pharmacist, who surrendered his DEA registration, had diverted 68 1000-count bottles of pseudoephedrine. These 68 diverted bottles were sold by reputable wholesalers. There are very few legitimate needs for a 1000-count bottle. The Suspicious Orders Task Force discussed this issue at length. The number of manufacturers making 1000 count bottles is declining. DEA welcomes this trend.

Mr. Uncapher reported on other trends:

• Traffickers are switching from iodine to tincture of iodine. DEA is completing a final rule on iodine for the Federal Register. Mr. Gale Prince of the Food Marketing Institute asked about the size of iodine tincture product that is subject to diversion. Gallons and pints are being diverted, not "consumer" size. The Suspicious Orders Task Force report has additional guidance which should be utilized.
• Another trend occurring in California where pseudoephedrine is becoming scarce (the street price for a case in northern California is $4,000) is traffickers seeking DEA registrants on the Internet. They are willing to travel to distant locations to obtain the product.
• Increasing thefts of pseudoephedrine bulk powder demonstrate why it is important to provide security for these regulated products. Thefts are occurring at all levels of the distribution system. Mr. Uncapher reminded the meeting of the requirement for suppliers to report thefts. Frequently these reports are not submitted in a timely manner.
• The MCA exempted pseudoephedrine and phenylpropanolamine blister packs from retail sales limits. It is clear that products in blister packs still make their way to the labs. Deblistering machines, to make the illicit manufacturing process faster, have been found.
• Traffickers are obtaining pseudoephedrine in case quantities from practitioners, including veterinarians and doctors. The controlled substances registrant exemption, Code of Federal Regulations Sec. 1309.25, does not authorize large-volume distributions. Pharmacies as well as practitioners are advised that any shipments to destinations in the Middle East or Far East must be shipped by a registrant who has separate registration with DEA as an exporter.
• DEA sends warning letters to those companies whose products are found at clandestine lab sites. Some companies defend their actions on the grounds that since they are selling only to DEA registrants, they are without blame. Distributors need to go further than merely ascertaining DEA registration. What is the business of the customer? What is the end use, what is the final destination?

Surveillance List/Chemical Mixtures

Mr. Frank Sapienza reported that traffickers have been relatively consistent in the precursors which they use to make methamphetamine. Part of the reason they have not switched is because of the Chemical Diversion and Trafficking Act (CDTA) and other laws which regulated several important substitute chemicals. Although the major diverted chemicals have not changed, some of the minor chemicals have. The MCA required DEA to establish a Special Surveillance List of chemicals and equipment which can be used in the illicit production of controlled substances or listed chemicals. It has two purposes: to identify chemicals that are currently not controlled and are used to manufacture illicit products; and to provide for additional corrective measures, including civil penalties. The list includes every listed chemical as well as an additional 28 chemicals, 16 of which are used to manufacture methamphetamine.

The list was published on May 13, 1999 in the Federal Register. It is also available on DEA’s home page. Mr. Sapienza pointed out that in addition to List I and List II chemicals, the Special Surveillance List includes the next most important chemicals used to produce illicit drugs and laboratory supplies. There are four pieces of equipment on the list, which probably are not handled by the segment of industry present at the meeting. Additions or deletions to the Special Surveillance List will be made by means of the Federal Register notice process.

In response to a question from Mr. Ty Kelley, Senior Government Relations Representative at the Food Marketing Institute, Mr. Sapienza explained that these Special Surveillance List chemicals are purchased mainly through chemical distributors rather than at retail outlets, though there are some available at retail outlets. The Special Surveillance List and "Reckless Disregard" outline were provided. Mr. Lyle Beckwith, Director of Government Relations at the National Association of Convenience Stores, and Mr. Kevin Kraushaar, Director of State Government Relations at the Consumer Healthcare Products Association, suggested that DEA produce a practical guide to aid industry as to which products containing these listed items might be found at retail settings. Mr.Wolf thought that the suggestion was excellent and will plan to include this as part of an ongoing project.

Under the CDTA, chemical mixtures were exempted from the definition of regulated transaction. DEA found that traffickers were defeating the system by using solvent blends and other products which met the exemption criteria. In 1993 Congress amended the law so that the only exempt chemical mixtures are those that cannot be used to produce controlled substances and cannot be extracted from controlled substances. DEA will promulgate regulations. A Notice of Proposed Rule Making was published, and after a number of extensions, the comment period ended on April 16, 1999. DEA is reviewing the comments and will subsequently finalize the regulation.

The proposal contains a three-tiered approach:

First, a maximum concentration level is established for each listed chemical. If the concentration of the listed chemical(s) in a mixture is below this maximum, the mixture is automatically exempted.

Second, certain categories of products would be automatically exempted including unaltered harvested plant material, completely formulated paints and coatings, and Environmental Protection Agency (EPA) covered hazardous waste.

Third, an application process was proposed for products that do not fit in any of these categories but that meet exemption criteria. Under this provision, a manufacturer could apply for exemption for a single product or group of products by showing that they could not be used in the illicit production of controlled substances and the listed chemical could not be readily extracted.

Dietary supplements, including ephedra products, are considered chemical mixtures and are being addressed in these regulations. Although ephedra products have not frequently been found at clandestine labs, they can be and have been used to produce methamphetamine. Tinctures of iodine are also being treated under the chemical mixture regulation.

The MCA also identified iodine and anhydrous hydrogen chloride as List II chemicals. DEA proposed thresholds for both substances and received a number of comments. Several comments regarding anhydrous hydrogen chloride transactions raised issues regarding the regulation of certain categories of transactions which may not be likely sources of diversion. These are being reviewed before a regulation on the thresholds is finalized.

Registration

Mr. Frank Moreno, Chief of the Data Processing and Analysis Unit, reported that there are about 3,300 companies that have chemical registration certificates, and about 200 companies with pending applications. The majority are distributors with some manufacturers, importers, exporters, and a few ephedrine retailers. These numbers do not include companies which have controlled substance registrations and are distributing drug products that contain List I chemicals under those registrations. The current application fee schedule is $595 for manufacturers, distributors, importers, and exporters of bulk List I chemicals. Much of this fee has been waived, resulting in a registration fee of $116 for manufacturers and distributors of drug products containing certain List I chemicals. However, the $595 amount is still in the regulations. Retail registrants pay a total fee of $255. The fee includes $7 for application processing and $248 for the pre-registrant investigation. Current renewal fees are $477 for all business activities, excluding retail distributors who pay $116 for renewals.

A Federal Register notice on the subject of fees is being prepared. The first fees were based on an estimate of the anticipated registrant population. Because the actual size of the registrant population is double the estimate and there have not been significant cost increases in the program, registration fees will be reduced. Refunds to companies that paid the higher renewal fee for re-registration are under consideration. While there will be a significant reduction in registration fees, the new fee will exceed the current cost of $116.

DEA is planning improvements to the registration activity. Using the Internet for registration is under consideration. Security is a major concern and the problems are complex. Security studies are underway. Plans are being developed to increase information for registrants on the Internet and to provide facsimile responses to frequently asked questions.

Policy, Legislative and Regulatory Issues

Mr. Andy McFaul, Program Analyst in the Policy Unit, discussed the mail order reporting requirement. He explained that Internet sales are covered by the mail order reporting requirement. Even though Internet sales appear to be at the retail level, sales in the electronic setting do not meet the retail definition. The face-to-face requirement that is a key element of the retail definition is missing. An Internet transaction is similar to written or telephone orders in that the purchaser retains anonymity and the ability of the seller to determine the legitimacy of the transaction is diminished.

Mr. Lyle Beckwith asked if DEA has a minimum age requirement for purchasers of chemical drug products. He noted that in many hours of discussion with the House Commerce Committee, he observes very little interest in impeding Internet commerce. There is considerable interest, however, in closing loopholes that allow Internet orders to be placed for private delivery of regulated items such as tobacco, alcohol and prescription drugs. There is consideration of requiring customer identification for these types of Internet sales, making the shipper act as the retail agent.

Mr. Wolf added that he had recently clicked on to a prominent pharmacy Internet site to determine if chemical drug products are being offered. They are, and the site is registered as a controlled substances registrant, exempt from chemical registration under 21 CFR 1309.25. But when he checked, he learned that the registrant is not reporting to DEA in accordance with the mail order reporting requirement. The fact that they are not reporting is assumed to be a legitimate oversight. The Internet and mail orders are issues that need our increased attention. Generally, the mail order reporting requirement has been effective in removing some of the egregious violators who were making massive shipments.

Mr. Beckwith noted that the shift to mail order commerce represents a shift from face-to-face transactions to anonymous purchases of legitimate products that can easily be used for illegitimate reasons. Mr. McFaul added that whether it is retail, wholesale or manufacturing, there is enough money that traffickers will explore every opportunity for diversion. The goal is to reduce their success.

In regard to mail order reporting, a legislative amendment is under development to establish exemptions for categories such as sampling of products and prescriptions from mail order pharmacies. In addition to specific categorical exemptions, the amendment will provide DEA with discretionary authority to exempt transactions when circumstances allow. Categorical exemptions are advantageous for addressing common issues, but any number of unique circumstances may arise. DEA would like to have the discretion to provide the exemption through the regulatory process, and segments of the industry are in support.

CSA Registrant Exemption

Mr. McFaul spoke about the CSA registrant issue regarding freight forwarding/cross docking. Some controlled substances distributors are relinquishing their controlled substances registrations to operate as freight forwarders. As controlled substances registrants, they were exempt from the registration requirement for distributors of chemical drug products. After they have relinquished the controlled substances registration, they have also relinquished the exemption for distributing chemical drug products. He advised participants to make certain they understand the need to check with DEA and know how to handle chemicals. DEA is considering whether an exemption for controlled substances justifies a similar exemption for chemical sales.

Thefts and Losses

Mr. McFaul noted that historically distributors have depended on knowledge of the customer and close attention to sales as a means to control diversion. One of the indicators of how effective the chemical regulations have been is the price of pseudoephedrine in bulk or drug product form on the street. The price for a 25 kilogram barrel of bulk powder is $50,000-$80,000 and $1200-$4000 for a case of drug product tablets. These chemicals are highly sought on the illicit market. There are reports of armed robberies. As a result, legitimate handlers are advised to provide extra safeguards for these chemical products.

Brokers/Internet

Mr. McFaul spoke about current situations where drug product suppliers and Internet providers enter into partnerships in which the Internet provider does not handle the drug products directly. Rather, the drug product supplier handles the shipping of the products to the customers per orders received from the Internet provider. However, due to the manner in which the transactions are constructed, the Internet provider may still have to register with DEA as a distributor. For instance, Internet provider ABC maintains a site at which it receives orders for regulated drug products from customers. The customers pay ABC directly for the products ordered. ABC refers such orders to drug wholesaler DEF, which picks, packs, and ships the products directly to the customers. However, DEF records the transactions as sales to ABC, bills ABC directly for the sales, and includes an invoice from ABC in the package to the customer.

In the above case, ABC is distributing, despite the fact that it never physically handles the products. The definition of distribution is to deliver, and deliver is defined as the " . . . actual, constructive, or attempted transfer . . ." In this example, the transactions are sales by the DEF drug wholesaler to ABC, Internet provider, with ‘drop-shipment’ to ABC’s customers. Thus, ABC must register as a distributor and satisfy all of the recordkeeping and reporting requirements for the sales to individual customers. Additionally DEF must register for its distributions to ABC and satisfy the recordkeeping and reporting requirements associated with those sales.

Suspicious Orders Task Force (SOTF)

Bill Wolf reported that the Department of Justice (DOJ) has completed its review of the task force report. He stated that final clearance by DOJ is anticipated in the near future. Mr. Wolf then discussed the importance of the SOTF recommendations in assisting drug product wholesalers to prevent this type of diversion. Many companies involved in diversion are selling large quantities of drug product as retailers. They do not, however, meet the definition of retail distribution. Although DEA does not expect wholesalers to become policemen, they must be aware of where their products are going. A serious effort must be made to identify these types of violative customers. Such efforts could include asking questions of the customers: Are you supplying a retail operation or a retail operation disguising itself as a wholesaler?

The Suspicious Orders Task Force report went to the Attorney General, and the committee members received their formal reports. The Department of Justice is expected to draft a response to the Suspicious Orders Task Force report for the Attorney General’s signature soon. The Department of Justice will likely ask DEA to reassess the 24-gm threshold level.

If a distributor has supplied a trafficker, DEA will look carefully at the situation. Were there attempts to verify the situation, attempts to cut off a suspicious customer? Those events generate warning letters.

Mr. Wolf then discussed the Federal 24 gm retail limit and the industry’s voluntary efforts to establish even lower limits on all products including exempt safe harbor products. Although these efforts have been helpful in limiting methamphetamine production, they have not been sufficient to prevent a continued increase in small (4 ozs or less) clandestine methamphetamine labs. He asked industry to consider this issue and to suggest solutions that would be practical for industry.

Mr. Wolf reported that while DEA is receiving some notifications of suspicious orders, the number is less than anticipated. Apparently some distributors have operated under the invalid assumption that the suspicious orders notification policy does not start until the Suspicious Orders Task Force report is adopted by the Attorney General. DEA is in the process of notifying companies to educate them. This notification also includes Internet sales. Internet sales are covered by the mail order reporting requirement. The potential for diversion in Internet transactions is high and the diversion is hard to detect. The reason that the shipping address is a mail order reporting requirement is to make it possible to detect a pattern if multiple distributors are shipping to a single address. Industry members should be reminded that it is important to know shipping destinations for all Internet sales. Even legitimate pharmacies can be misled.

Ms. Diane Goyette, Director of Regulatory Affairs for the National Wholesale Druggists Association, advised that Task Force guidelines may be expensive to implement and that it is important that the recommendations are clearly communicated to industry.

Mr. Michael Stulberg of the American Wholesale Marketers Association asked what DEA can do to provide feedback to reporters of suspicious orders. He described cases where distributors who have notified DEA of suspicious customers have subsequently lost sales to their competitors. Lacking feedback from DEA on their reports, they question the effectiveness of the notification system. Ms. Mary Ann Wagner, Vice President for Pharmacy Affairs for the National Association of Chain Drug Stores, agreed and emphasized the importance of getting back to callers. Many members report to her that they receive no follow-up calls. Mr. Wolf concurred and added that DEA Headquarters needs to issue guidelines.

Ms. Mary Kate Whalen, DEA Office of Chief Counsel, interjected that DEA is precluded from disclosing investigative information. DEA can, however, advise that action is being taken as a result of a report. We can only tell industry that their tips do matter. Mr. Wolf reminded that the law puts the onus on the wholesaler or manufacturer to stop the transaction if there is suspicion that the material would be used for illegal purposes. Mr. David Durkin, attorney for the Food Marketing Institute, asserted that in his opinion the distributor’s responsibility is merely to report to DEA -- not to halt the transaction. Mr. Wolf provided further explanation on the distributor’s responsibility to halt transactions.

A participant noted that conversations with pharmacy school graduates in several states revealed that little or no time is devoted to the requirements of the MCA. It was recommended that DEA contact pharmacy schools to request that the MCA requirements be added to the curriculum.

Mr. Wolf again raised the possibility of eliminating the 1000 count bottles and moving to safe harbor packaging, as recommended in the Supplementary Report of the Suspicious Orders Task Force. He noted that this could be accomplished voluntarily. Industry has the ability to eliminate this problem by discontinuing the 1000 count package. The availability of 1000 count bottles has created an increase in demand for this size. More pharmacies are ordering the 1000 count bottles today than two years ago. They are ordering 1000 count bottles from corporations represented by associations present at this meeting. Mr. Kraushaar pointed out that the 1000 count bottle is not a traditional bottle and is usually produced by a generic company. He suggested that DEA contact generic manufacturers.

Mr. Wolf concluded by urging industry to consider adopting several measures, which follow:

1. Act on the SOTF recommendation to move to smaller package sizes now. National distributors are still distributing 1000 count bottles when that was specifically cited as an unnecessary type of packaging. A move to safe harbor packaging for all purposes would further deter criminal ease in access.
2. Implement the SOTF guidelines and indicators now. Some companies have been waiting for some affirmation by the Attorney General on the SOTF recommendations. Now is better than later.
3. Cut off customers who will not cooperate on retail limits and other instituted measures. The potential loss in legitimate sales is small.
4. In setting voluntary limits review state actions for useful benchmarks.
5. Incorporate the SOTF guidelines in codes of conduct or good practices policies.

Conclusion

Ms. Good thanked the group for participating. She noted that many complex topics were discussed and that further dialogue would be useful. The next meeting will be scheduled in about six months.