Problem Solved!!!
OK, so we had the chemical smell issue as well - something that smelled like fingernail polish coming from the AC. Somewhat intermittent. It seemed to be getting worse, so we took it to the dealer. The dealer claimed they could not repeat the smell, but nonetheless they searched for a Freon leak. Finding none, they pumped all of the Freon out of the system and weighed it, to find that little to none had leaked out the system compared to spec. They then phoned me and we spent the better part of an hour trying to brainstorm what might be the issue. No joy, and we took the car back home. The smell continued off and on.
So yesterday it rained like crazy around here, leaving the roads wet with lots of puddle splash. The smell was overwhelming in the car - to the point that my wife would not drive the car without the windows down, even in the rain. (Its her car). Back to the dealer this morning. When I got there, the odor had gone away of course. The head of the garage came out and we spent the better part of an hour driving it around together, trying to repeat the smell. Back at the bimmer garage we finally figured it out. Amazingly it was...get this... windshield washer fluid.
Here's the gig: the bmw washer fluid has an odor. When you wash your windshield the fluid drains across the cabin ventilation intake under the top of the hood. When you have the AC set to anything other than recirculate, the cabin air samples any vapors that reside in the ventilation intake. The intake has a drain so that rainwater, etc., flows on through, but as washer fluid in the ventilation intake dries it is by definition turning to vapor. We simply took a hose and washed down the windshield, which in turn flushed out the ventilation intake. Back in the car, there was no odor. When we switched on the windshield washers - voila, odor.
The fix was extremely simple of course. Run the washers until they are dry. Refill with a different washer fluid. Run them dry again. Repeat. Flush the ventilation intake with a garden hose. Refill the washers with your fluid of choice. All done. Wife happy.
Hope this helps others.