Statement of Gene R. Haislip before the Commerce Committee Subcommittee on Oversight and Investigations June 7, 2001

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Written Statement of Gene R. Haislip Consultant Controlled Drugs and Chemicals Law, Policy, Administration and Enforcement before the Commerce Committee Subcommittee on Oversight and Investigations June 7, 2001

Mr. Chairman and distinguished members of the Committee,

My name is Gene R. Haislip and I am presently a consultant to the pharmaceutical and chemical industry on issues involving controlled drugs and chemicals. I served for 29 years of my government career in the US Drug Enforcement Administration and, for the last 17 years, was the head of the agency's Office of Diversion Control from which I retired as a Deputy Assistant Administrator of DEA in March of 1997. This is the office responsible for all of the control and enforcement programs dealing with legitimate drugs and chemicals which are diverted into the illicit drug traffic. I am also now assisting the United Nations Drug Control Program in the design and implementation of a chemical control program in the Central Asian Republics bordering Afghanistan.

I am very pleased to have this opportunity to testify before you today on a subject of great importance to our fellow citizens and one that has occupied so much of my professional effort. It is my sincere hope that I will be able to make some small contribution to your deliberations.

Drugs and pharmaceuticals have become a major and pervasive social concern both because of their life-giving benefits and, in many cases their debilitating abuse. It is crucial that we take measures to minimize these abuses and at the same time, seek to insure that our citizens can rely upon the efficacy, and purity of their medications. The extraordinary availability of technology, the speed and ease of global commerce and the ingenuity of the criminal mind have resulted in the massive diversion and illicit manufacture of drugs of abuse and have also begun to undermine the integrity of vital medicines by the trafficking in bogus, counterfeit products which may cause the death or injury of innocent, unsuspecting persons.

Much of what I will relate in my testimony deals with the problems of the diversion, clandestine manufacture and counterfeiting of that smaller group of pharmaceuticals known as controlled substances. However, the lessons of this experience are absolutely critical to understand the challenges that we face in dealing with all classes of pharmaceuticals. In most cases, the criminal technique employed for one, are essentially the same for the other, except that in the case of non-controlled products, we lack many of the basic tools with which to attack these problems. Hereafter, I will attempt to develop this in greater detail, but first, some basic statement of the situation is necessary to establish a context.

I. Nature of the Problem

The demand created by addicts and drug abusers is obviously of quite a different nature than that of legitimate consumers for the medicines they require. Yet there is a certain similarity which in both cases may result in stimulating the traffic in counterfeit pharmaceuticals. Although most people commonly think of the illicit drug traffic in terms of such drugs as heroin, marihuana or illicit cocaine, in fact, many important legitimate drugs are also powerful narcotics, stimulants or depressants that are frequently sought by drug abusers.

Just like other consumers, drug abusers and addicts have learned the various brand names and appearance of the drug products they are seeking. Consequently, drug traffickers employ every criminal means they can to obtain these legitimate products to sell to their customers at tremendously inflated prices. But because of controls, it often happens that these products cannot be obtained in sufficient quantity from legitimate sources and drug traffickers undertake to counterfeit their own dosage forms to meet the demand.

In a similar fashion, criminal organizations sometimes seek to meet the legitimate demand for brand name pharmaceuticals by counterfeiting inexpensive, perhaps entirely bogus dosage forms in order to defraud both legitimate patients and manufacturers. If the legal and law enforcement situation is inadequate to prevent such schemes, cheap, impure, ineffective and perhaps highly toxic counterfeits can drive out the legitimate product. This is the subject with which we are concerned in this hearing.

II. Methaqualone Diversion; A Prototypic Example

I know of no finer example of the capabilities of international criminal groups to corrupt global commerce than the massive illicit traffic in counterfeit Methaqualone tablets known as 'Quaaludes' which occurred in the early 1980s. It is for me, largely a personal story, but briefly worth the telling because it illustrates how far such a problem can develop. All of these same conditions continue to exist and generally characterize the traffic in all diverted and counterfeit pharmaceuticals.

During the late seventies, a strong depressant drug known as 'Quaalude' became a major drug of abuse, especially among adolescents. This resulted in increasing addictions, overdose deaths, and an extraordinary rate of automobile fatalities. At the time, a US company was manufacturing about seven metric tons of the drug a year for legitimate medical use and much of it was being diverted. Suddenly, it had become a drug which was producing as many deaths and injuries as either heroin or cocaine.

By 1980, we had determined that the country was being inundated by these Quaalude pills in such extraordinary quantities as to far exceed national production. By reviewing the DEA daily enforcement reports, it soon came to my attention that shipments containing one and two tons of these pills were being seized almost weekly from small aircraft that had originated in Colombia. The tablets turned out to be counterfeits but were equally potent and usually contained the 300 milligrams of the drug just like the legitimate US product.

A quick check revealed that this synthetic drug was not manufactured in Colombia and I set off for Colombia, and particularly the port of Barranquilla, with the task of discovering the original source of this material. As a result, the Colombian Customs and National Police were soon making the seizures which permitted us to gradually piece together the entire story of this traffic and put an end to it. It is one of the very few complete victories of our enforcement efforts, in that this huge billion-dollar traffic was eliminated. Here is what we found.

The Colombian drug traffickers had identified every known source of the legitimate manufacture of this drug, which involved countries in Western Europe, Eastern Europe and Asia and brokers and free trade zones in many others. Through one technique or another, they were purchasing virtually the entire global production of bulk Methaqualone powder for eventual shipment to Colombia where it was rendered into counterfeit Quaalude tablets exactly like the popular legitimate product produced in the US. As a result of establishing the production capacities of these foreign facilities and the large seizures which we began to make, I estimated that approximately 150 metric tons of the bulk drug was being diverted and counterfeited each year. This was more than twenty times the quantity of the legitimate pills then being manufactured. In other words, the world's factories were mostly supplying only the drug traffic, and the legitimate product represented only about 5% of the total availability. Congress finaly eliminated all manufacture of this drug in the US and it has also ceased to be manufactured globally.

III. Diversion Techniques

What is most instructive is the manner in which all of this was accomplished. There were essentially two ways in which the material was obtained from source manufacturers. The most common method was to place orders through brokers, usually operating in the great free trade zones such as Rotterdam or Hamburg, or in Switzerland. In this way, neither party knows the identity of the other and the shipment is protected from scrutiny by Customs authorities that routinely make no examination of goods in transit. These are considered harmless because they are not staying in the country and can do no harm to their temporary host! Moreover, if special labeling and shipping arrangements are desired in order to evade attention while in transit or upon arrival, it is easy to find a broker who will oblige. Essentially, the drugs enter the free trade zone and disappear from the face of the earth. The manufacturer may wonder who is ordering such quantities of drugs but has no legal responsibility to inquire.

The other method of obtaining the drug was to deal directly with the manufacturer. In one case, traffickers sent representatives to a foreign factory with suitcases full of US dollars to negotiate for multi-ton shipments. Their attempt to corrupt the management at this factory - which was partly owned by the foreign national government - was successful. As will be seen, similar, and even more blatant situations of the absolute corruption of factory management have arisen.

IV. Clandestine Production and Counterfeiting

In the case of Methaqualone, all of the active pharmaceutical ingredients (APIs) were purchased from legitimate sources and the actual counterfeiting occurred in Colombia. This is perhaps the easiest part of any clandestine operation. Used multi-stage tableting machines are readily available on the international market or they may be purchased new without arousing suspicion. It is also probably easy to substitute candy machines, which perform essentially the same functions as tableting machines. Counterfeiters are also quite capable of manufacturing capsules, ampoules, and blister packs. This is often seen on the Mexican border in the traffic in counterfeit steroids, while capsules have been used for counterfeit amphetamines (Black Beauties) beginning in the early seventies.

In the course of investigations of this type, it is quite common to find that persons with professional experience in the legitimate chemical and pharmaceutical industry have been recruited to perform the technical functions for which they were trained. On occasion, these individuals will in fact contact former colleagues still employed in legitimate enterprises and who are usually innocent of the purpose, to obtain sources or supplies.

If the desired bulk material (APIs) can not be purchased, arrangements can be made for its production. This is more likely to occur in those situations where legitimate facilities are experiencing financial difficulties, such as in Eastern Europe or in developing countries. In one such case, arrangements were made with the director and chief chemist of a struggling East European factory to establish a secret production facility within the company's 17-acre campus. It was easy to obtain the necessary chemicals without arousing suspicion and to relocate production equipment. To complete the arrangement, a new, top-of-the-line tableting machine which could produce 400,000 tablets per hour was purchased from a German firm. In another case, in a neighboring country, it happened that this factory was a producer of an important precursor material and some of the management and personnel decided to use it to establish an illicit production facility within the company. Unfortunately, as a result of political upheavals and marginal economies, there are many such situations like these, which are often ripe for corruption.

If it is not possible to corrupt the management of a suitable facility, in some countries a criminal organization may rent an existing facility during evenings or for weeks or weekends. But it may be more expedient to build your own facility. There are examples in both Western and Eastern Europe in which this has been done for drugs such as MDMA and Methamphetamine. In these cases, very knowledgeable, well-funded criminal organizations acquired a suitable site in the city or the suburbs and proceeded to purchase brand new, top-of-the-line reaction vessels, tableting machines and vats and piping and dryers. These were small but modern, up-to-date, elegant production facilities costing more than a million dollars. In one of the more fascinating cases, a group of traffickers purchased large lots of cocaine in Colombia for distribution in Europe to finance their secret factory in a European capital. This factory was intended to supply illicit markets in both Europe and the US.

V. Packaging and Distribution

Counterfeit packaging is generally no more difficult than counterfeiting tablets. In most cases, only the original legal manufacturer of the real product can tell the difference, and then only on close examination and search of records.

Distribution is probably the most difficult and risky activity of pharmaceutical counterfeiters. If the product is destined for the illicit drug traffic, it involves all of the risk attendant to the smuggling of heroin or cocaine. If the product were intended for legitimate consumption, the task would be much easier. The product itself appears to be legitimate and would cross Customs barriers with less notice and suspicion, especially since the services are focused on illicit drugs and commodities which require so much of their effort. Certainly, it is easy to establish a 'front company' with four or five employees to receive and market the goods to legitimate distributors. Such 'companies' have been routinely used in the US to import precursor chemicals for distribution to illicit manufacturers of Methamphetamine. Of course, the ease with which this can be accomplished will depend on the strength and enforcement of national legislation.

VI. Diversity of Counterfeit Pharmaceuticals

A. Drugs of Abuse

In the examples above, I have dealt primarily with the controlled pharmaceuticals that concern DEA. Before turning to other areas, I should like to complete this picture with a very brief summary, as the example given is only remarkable because of its scope and effect upon the US.

In the early 1970s, large quantities of secobarbital and amphetamine were imported into Mexico for the clandestine production of counterfeit capsules for illicit distribution in the US. These capsules closely resembled the products that had been previously obtained by traffickers from the Mexican subsidiary of a US firm. When their source of supply was cut off, they simply continued their illicit business with counterfeits. The same situation appears to have developed as a result of the control of steroids. When the diversion of these drugs was virtually eliminated by act of Congress in 1990, sophisticated counterfeit products immediately increased along the Mexican border.

In recent years, Europe, Africa, Asia, and the Middle East have all experienced similar large-scale diversion and counterfeiting of drugs of abuse. These include a variety of stimulant drugs ranging from amphetamine to Fenetylline, pemoline, amfepramone, and phentermine. It appears that both legitimate and clandestine manufacturing sources of bulk material have been used at various times. Clandestine laboratory and counterfeiting facilities producing such materials have frequently been seized in the Balkans and major points of sale and distribution are focused on Africa and the Middle East. Other commonly counterfeited products include Mandrax (the European form of methaqualone), Diazepam (Valium), Flunitrazepam (Rohypnol) and other benzodiazepines.

B. General Pharmaceuticals

The evidence suggests that the counterfeiting of other classes of pharmaceuticals is equally widespread. The first international effort to define the problem was a workshop organized by the World Health Organization (WHO) together with the International Federation of Pharmaceutical Manufacturers Associations (IFPMA) in Geneva in April of 1992. It found that the counterfeiting of medicines had greatly increased and involved billions of dollars annually. A recent list of actual case reports from various countries included the following types of counterfeit medications: antibiotics, diuretics, antimigraines, antiparkinsonians, analgesics, antispasmodics, muscle relaxants, antianaemics, antihistamines, corticosteroids, anitfungals,vasodilators, tranquillizers, vaccines, antimalarials, birth control pills and more. We may say that most of the classes of drugs that can be marketed to consumers were involved.

The WHO Department of Essential Drugs has continued this work and in 1999, issued a very commendable set of guidelines for the development of measures to combat the problem. This report took note of some of the increasingly common 'horror stories' of the carnage caused by defective counterfeit products such as deaths of children resulting from liver damage caused by the inclusion of toxic substances and unplanned pregnancies resulting from birth control pills containing no active ingredient.

The reason for their growing availability and popular acceptance, as noted by WHO executive Dr. Suzuki at the World Health Assembly in May 2000, is the combination of 'profit and price', the usually dynamic of any drug traffic. Pharmaceutical counterfeiters, who do not have to trouble themselves with producing a quality product, or paying for any of the expensive research that originally created it, can concentrate on the authenticity of appearance and still offer a bargain price. A speaker from the Health Ministry in Benin observed that people were dying from counterfeit drugs daily, but continued to buy them because of their relatively cheap price. While visiting Nigeria some years ago, I found that the usual 'pharmacy' services were offered on the street from the trunk of beat-up vehicles where, according to experts, most of the modern medicines were counterfeits.

WHO reports that although counterfeit pharmaceuticals are extremely common in developing countries, they have also been found in developed countries as well. Indeed, the principal consumer interest driving much of the counterfeit pharmaceutical market along the Mexican border is also the desire for cheaper medications. Who wants to pay more when you can pay less? Who wants to pay for another office visit to the doctor when you can buy the drug that you have been using at a cheaper price on the other side of the border, and without a prescription!

VII. Deficiencies in Control and Enforcement

Perhaps the greatest service that WHO has rendered is to enumerate the current massive deficiencies in national and international efforts to deal with the problem. I think that those of us who work in the area of controlled drugs are particularly aware of this because of the total lack of most of the tools, institutions and practices that we regularly use. I am perhaps especially sensitive to this, having so often experienced the frustrations of laboring to organize international enforcement cooperation in the absence of clear and specific legal authority. This proved to be an excruciating problem in dealing with the example I gave of Methaqualone which, although the subject of an extraordinary illicit traffic was not under legal control in most of the countries that were feeding it. The first attitude is always the same; "We don't have an obligation, we don't have the authority, and we don't have the time." Let's look at some of the specifics.

The counterfeiting of pharmaceuticals is a thoroughly international problem. Production and distribution seldom occurs within a single country and often involves global commerce. Yet there is no specific multilateral treaty imposing obligations to criminalize, report, or cooperate in the suppression of this traffic, nor any international staff to collect, analyze and disseminate information. This contrasts sharply with our work in the area of drugs of abuse where we have had treaties since 1911 and a Board and staff, which monitors their compliance.

Perhaps of most importance is the fact that, as a result of efforts that DEA and others have made, a functioning, effective informal international law enforcement effort has been constructed around these agreements. The staff of the International Narcotics Control Board is daily working with the law enforcement agencies of dozens of countries which all communicate and cooperate together in operations to suppress illicit diversion of both controlled drugs and chemicals. I assure you that the results are quite impressive and have had significant impact on the traffic in a long list of narcotics, stimulants, and depressants that are often diverted into the illicit traffic, as well as chemicals for the manufacture of methamphetamine, amphetamine, MDMA, cocaine, and heroin. This structure does not exist in the area of counterfeit pharmaceuticals.

Since there is no treaty, there are also no legal obligations to penalize certain actions, or designated agencies to systematically collect intelligence or assist each other in investigations. I would defer to the FDA for an account of the situation in the US, but in most cases, I doubt that there is specific assignment of clear enforcement responsibilities and mandate, together with dedicated personnel and resources. Usually, such laws as exit are of a regulatory nature and are generally the responsibility of the Health Ministries. The national law enforcement agency may help out on a selective, ad hoc basis. This approach is lacking in the advantages which we possess in the area of controlled drugs and chemicals. In short, on a global level:

  • national laws are often inadequate,
  • international shipments are not searched or verified in free trade zones,
  • there is a lack of dedicated enforcement personnel and resources,
  • there is no systematic data base and no requirement for one,
  • there is no specific treaty or set of uniform international obligations,
  • there is no dedicated staff to monitor compliance, and
  • there is no functioning, systematic international law enforcement effort.

VII. Future Challenge of the Global Economy

The pharmaceutical industry has become an increasingly important part of health care and is deserving of specific attention, regulation and protection from crime and corruption. It is clear that there are strong financial incentives to engage in pharmaceutical counterfeiting. The level of criminal activity can be expected to increase rapidly with the globalization of commerce and the emphases on speeding this commerce through Customs barriers. Moreover, the increasing variety, effectiveness and elegance of pharmaceutical remedies will also increase these financial incentives.

The potential damage from this criminal activity is enormous and includes:

  • injury to patients whose maladies go untreated because of reliance upon substandard or entirely bogus counterfeit preparations,
  • injury to patients who unwittingly consume counterfeit preparations containing poisonous ingredients,
  • damage to the entire public health system by undermining public confidence in medications and the pharmaceutical delivery system,
  • damage to the pharmaceutical industry in terms of lawful revenues and public confidence, and
  • Provision of additional financial support for crime, violence and corruption.

I think that in so far as the United States is concerned, we have thus far been spared most of the consequences of this problem, although there is ample warning on our southern border of what it will look like, if unattended. But to protect our people in the future, and to establish an enforcement regime that will protect all people, we must invent some things that do not now exist.

Thank you very much for your attention and for this opportunity to contribute to your valuable work.

Yours sincerely,

Gene R. Haislip