[Federal Register Volume 83, Number 78 (Monday, April 23, 2018)]
[Notices]
[Pages 17644-17648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08354]


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DEPARTMENT OF COMMERCE

Bureau of Industry and Security


In the Matter of: Zhongxing Telecommunications Equipment 
Corporation ZTE Plaza, Keji Road South Hi-Tech Industrial Park Nanshan 
District, Shenzhen China; ZTE Kangxun Telecommunications Ltd. 2/3 
Floor, Suite A, Zte Communication Mansion Keji (S) Road Hi-New 
Shenzhen, 518057 China Respondent'; Order Activating Suspended Denial 
Order Relating to Zhongxing Telecommunications Equipment Corporation 
and Zte Kangxun Telecommunications Ltd.

Background

    On March 23, 2017, I signed an Order approving the terms of the 
Settlement Agreement entered into in early March 2017, between the 
Bureau of Industry and Security, U.S. Department of Commerce (``BIS'') 
and Zhongxing Telecommunications Equipment Corporation, of Shenzhen, 
China (``ZTE Corporation'') and ZTE Kangxun Telecommunications Ltd. of 
Hi-New Shenzhen, China (``ZTE Kangxun'') (collectively, ``ZTE''), 
hereinafter the ``March 23, 2017 Order.'' Under the terms of the 
settlement, ZTE agreed to a record-high combined civil and criminal 
penalty of $1.19 billion, after engaging in a multi-year conspiracy to 
violate the U.S. trade embargo against Iran to obtain contracts to 
supply, build, operate, and maintain telecommunications networks in 
Iran using U.S.-origin equipment, and also illegally shipping 
telecommunications equipment to North Korea in violation of the Export 
Administration Regulations (15 CFR parts 730-774 (2017)) (``EAR'' or 
the ``Regulations''). ZTE also admitted to engaging in an elaborate 
scheme to hide the unlicensed transactions from the U.S. Government, by 
deleting, destroying, removing, or sanitizing materials and 
information.
    Under the terms of the Settlement Agreement and the March 23, 2017 
Order, BIS imposed against ZTE a civil penalty totaling $661,000,000, 
with $300,000,000 of that amount suspended for a probationary period of 
seven years from the date of the Order.\1\ This

[[Page 17645]]

suspension was subject to several probationary conditions stated in the 
Settlement Agreement and March 23, 2017 Order, including that ZTE 
commit no other violation of the Export Administration Act of 1979, as 
amended (50 U.S.C. 4601-4623 (Supp. III 2015)), the Regulations, or the 
March 23, 2017 Order. The March 23, 2017 Order also imposed, as agreed 
to by ZTE, a seven-year denial of ZTE's export privileges under the EAR 
that was suspended subject to the same probationary conditions. The 
March 23, 2017 Order, like the Settlement Agreement, provided that 
should ZTE fail to comply with any of the probationary conditions, the 
$300 million suspended portion of the civil penalty could immediately 
become due and owing in full, as well as that BIS could modify or 
revoke the suspension of the denial order and activate a denial order 
of up to seven years.
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    \1\ In addition to the BIS-ZTE settlement, ZTE Corporation 
entered into a plea agreement with the Justice Department's National 
Security Division and the U.S. Attorney's Office for the Northern 
District of Texas, and entered into a settlement agreement with the 
Treasury Department's Office of Foreign Assets Control. The civil 
penalties (including the $661 million civil penalty imposed by BIS) 
and the criminal fine and forfeiture totaled, when combined, 
approximately $1.19 billion.
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    The Settlement Agreement and March 23, 2017 Order require that 
during the probationary period, ZTE is to, among other things, complete 
and submit six audit reports regarding ZTE's compliance with U.S. 
export control laws. The Settlement Agreement and March 23, 2017 Order 
also include a broad cooperation provision during the period of the 
suspended denial order. This cooperation provision specifically 
requires that ZTE make truthful disclosures of any requested factual 
information. The Settlement Agreement and March 23, 2017 Order thus, by 
their terms, essentially incorporate the prohibition set forth in 
Section 764.2(g) of the EAR against making any false or misleading 
representation or statement to BIS during, inter alia, the course of an 
investigation or other action subject to the EAR.
    On February 2, 2018, acting pursuant to the Settlement Agreement 
and March 23, 2017 Order, BIS requested, among other things, that ZTE 
provide a status report on all individuals named or otherwise 
identified in two letters sent by ZTE, through its outside counsel, to 
the U.S. Government, dated November 30, 2016, and July 20, 2017, 
respectively. The status report was to include, among other things, 
current title, position, responsibilities, and pay and bonus 
information from March 7, 2017 to the present. The first of those two 
letters, dated November 30, 2016, was sent during BIS's investigation 
of the violations alleged in the Proposed Charging Letter and 
referenced in the Settlement Agreement and March 23, 2017 Order. In 
that letter, ZTE described ``self-initiated'' employee disciplinary 
actions it asserted that it had taken to date and additional actions 
that the company said it would take in the near future because they 
were ``necessary to achieve the Company's goals of disciplining those 
involved and sending a strong message to ZTE employees about the 
Company's commitment to compliance.'' The letter focused on ZTE's 
asserted commitment to compliance, including from the highest levels of 
management.
    The July 20, 2017 letter, sent on ZTE's behalf during the March 23, 
2017 Order's seven-year probationary period, also asserted ZTE's 
commitment to compliance and claimed that the disciplinary actions 
taken had sent a very strong message to ZTE employees. The letter was 
sent ``to confirm that the measures detailed by ZTE with respect to 
discipline have been implemented'' against nine named ZTE employees 
identified during the U.S. Government's investigation. The employee 
disciplinary actions--actions that ZTE told the U.S. Government that it 
had already taken--were in ZTE's words a showing of ZTE's ``overall 
approach to discipline and commitment to compliance,'' which the 
company described as ``significant and sufficient to prevent past 
misconduct from occurring again at ZTE.'' Nearly all of the employees 
named in the July 20, 2017 letter had been specifically identified to 
ZTE by the U.S. Government as individuals that U.S. law enforcement 
agents wanted to interview during the investigation, either because 
they were signatories on an internal ZTE memorandum discussing how to 
evade U.S. export controls, were identified on that memorandum as a 
``project core member'' of that evasion scheme, and/or had met with 
ZTE's then-CEO to discuss means to continue evading U.S. law. Three 
were members of the ``Contract Data Induction Team'' involved in 
extensive efforts to destroy and conceal evidence described in more 
detail below and in the PCL.
    In sum, through those two letters, ZTE informed the U.S. Government 
that the company had taken or would take action against 39 employees 
and officials that ZTE identified as having a role in the violations 
that led to the criminal plea agreement and the settlement agreements 
with BIS and the U.S. Department of the Treasury's Office of Foreign 
Assets Control. In fact, and as ZTE now admits, the letters of 
reprimand described in the November 30, 2016 letter were never issued 
until approximately a month after BIS's February 2, 2018 request for 
information, and all but one of the pertinent individuals identified in 
the November 30, 2016 or July 20, 2017 letters received his or her 2016 
bonus.\2\ These false statements were not corrected by ZTE even in part 
until March 2018, more than 15 months from ZTE's November 30, 2016 
letter, approximately a year from the Settlement Agreement (which ZTE 
executed on March 2, 2017) and the March 23, 2017 Order, and nearly 
eight months from the July 20, 2017 letter. During a conference call on 
March 6, 2018, ZTE indicated, via outside counsel, that it had made 
false statements in the November 30, 2016 and the July 20, 2017 
letters. As discussed below, ZTE's first detailed notification occurred 
on March 16, 2018.
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    \2\ Some of the disciplinary actions ZTE discussed in its 
November 30, 2016 letter relate to employees who resigned from ZTE 
well before the date of that letter, including some even as far back 
as 2012 and 2013. ZTE asserted that such employees left the company 
by ``mutual understanding.'' Including these employees allowed ZTE 
to inflate the number of employees listed as subject to disciplinary 
action, and the material provided by ZTE to date does not establish 
that they were, in fact, subject to such action. The false 
statements discussed as violations in this order do not include, 
however, ZTE's statements relating to the circumstances under which 
these employees left the company. Nor do the false statements at 
issue relate to an employee referenced in the July 20, 2017 letter, 
concerning whom ZTE did not clearly state that disciplinary action 
had been taken. This order also does not relate to any issues 
relating to the termination of four officials addressed as part of 
the criminal plea agreement.
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Proposed Activation of Suspended Sanctions and ZTE's Response

    On March 13, 2018, pursuant to Section 766.17(c) of the 
Regulations, BIS notified ZTE of a proposed activation of the sanctions 
conditionally-suspended under the Settlement Agreement and the March 
23, 2017 Order, based on ZTE's false statements in its letters dated 
November 30, 2016 and July 20, 2017, respectively. The notice letter to 
ZTE also gave the company an opportunity to respond, which it did on 
March 16, 2018.
    I have reviewed in detail ZTE's response. In its letter, ZTE 
confirmed the false statements and, as discussed further infra, posed 
certain questions in rhetorical fashion. ZTE then proceeded to 
summarize its response upon ``discovering'' the failure to implement 
the stated employee disciplinary actions prior to March 2018, including 
its decision to notify BIS of the failures. The company also described 
the asserted remedial steps it had taken to

[[Page 17646]]

date, including the issuance in March 2018, of the letters of reprimand 
that were to have been sent in 2016-2017. ZTE additionally asserted 
that, for current employees whose 2016 bonus should have been reduced 
(by 30% to 50%), it would deduct the corresponding amount from their 
2017 annual bonuses ``to the extent permitted under Chinese law.'' ZTE 
also said it will pursue recovery from (certain) former employees of 
bonus payments for 2016 that the company had informed the U.S. 
Government would be reduced, but, contrary to those statements, were 
paid in full. Finally, ZTE reiterated what it described as the 
company's serious commitment to export control compliance and 
summarized its plan to continue its internal investigation of the 
matter.

ZTE's Pattern of Deception, False Statements, and Repeated Violations 
of U.S. Law

    In issuing the March 13, 2018 notice letter to ZTE, and in 
considering ZTE's response, I have taken into account the course of 
ZTE's dealings with the U.S. Government during BIS's multi-year 
investigation, which demonstrate a pattern of deception, false 
statements, and repeated violations. I note the multiple false and 
misleading statements made to the U.S. Government during its 
investigation of ZTE's violations of the Regulations, and the behavior 
and actions of ZTE since then. ZTE's July 20, 2017 letter is brimming 
with false statements in violation of Sec.  764.2(g) of the 
Regulations, and is the latest in a pattern of the company making 
untruthful statements to the U.S. Government and only admitting to its 
culpability when compelled by circumstances to do so. That pattern can 
be seen in the November 30, 2016 letter, which falsely documented steps 
the company said it was taking and had taken, as well as in the 96 
admitted evasion violations described in the PCL, which detailed the 
company's efforts to destroy evidence of its continued export control 
violations.
    In agreeing to the Settlement Agreement and the imposition of the 
March 23, 2017 Order, ZTE admitted committing 380 violations of the 
Regulations as those violations were alleged in BIS's PCL. The PCL 
detailed an extensive conspiracy, including as laid out in a 2011 
company memorandum drafted by ZTE Corporation's Legal Department and 
ratified by its then-CEO, to evade U.S. export control laws and 
facilitate unlicensed exports to Iran. During the conspiracy, ZTE 
leadership and staff employed multiple strategies in an attempt to 
conceal or obscure the true nature and extent of the company's role in 
the transactions and thereby facilitate its evasion of U.S. export 
controls, of which ZTE had detailed knowledge. As a result of the 
conspiracy, ZTE was able to obtain hundreds of millions of dollars in 
contracts with and sales from Iranian entities to ship routers, 
microprocessors, and servers controlled under the Regulations for 
national security, encryption, regional security, and/or anti-terrorism 
reasons to Iran.

ZTE Cover-Up Activity

    Of the 380 alleged and admitted violations, ZTE committed 96 
evasion violations relating to its actions to obstruct and delay the 
U.S. Government's investigation.\3\ These violations included making 
knowingly false and misleading representations and statements to BIS 
special agents and other federal law enforcement agents and agency 
official during a series of meetings between August 26, 2014, and at 
least January 8, 2016, including that the company had previously 
stopped shipments to Iran as of March 2012, and that it was no longer 
violating U.S. export control laws. In doing so, ZTE acted through 
outside counsel, who were unaware that the representations and 
statements that ZTE had given to counsel for communication to the U.S. 
Government were false and misleading. ZTE failed to correct those 
representations and statements, which were continuing in effect, until 
beginning to do so (via outside counsel) on April 6, 2016.
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    \3\ These 96 admitted violations are discussed in fuller detail 
in the Proposed Charging Letter attached to and incorporated by 
reference in the Settlement Agreement. In the Settlement Agreement, 
ZTE admitted each of the allegations and violations contained in the 
Proposed Charging Letter.
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    ZTE also engaged in an elaborate scheme to prevent disclosure to 
the U.S. Government, and, in fact, to affirmatively mislead the 
Government, by deleting and concealing documents and information from 
the outside counsel and forensic accounting firm that ZTE had retained 
with regard to the investigation. Between January and March 2016, ZTE 
went so far as to form and operate a ``Contract Data Induction Team'' 
made up of ZTE employees tasked with destroying, removing, and 
sanitizing all materials concerning transactions or other activities 
relating to ZTE's Iran business that post-dated March 2012. ZTE 
required each of the team members to sign a non-disclosure agreement 
covering the ZTE transactions and activities the team was directed to 
hide from the U.S. Government, subject to a penalty of 1 million RMB 
(or approximately $150,000) payable to ZTE if it determined that a 
disclosure occurred.

Determination To Activate the Suspended Denial Order

    It was with this backdrop in mind, as more fully alleged in the 
PCL, that the Settlement Agreement and the March 23, 2017 Order mandate 
that ZTE truthfully disclose, upon request, all factual information 
(not subject to certain privileges, which are inapplicable here), and 
that led BIS to make its February 2, 2018 request for information 
relating to the employee disciplinary actions stated in the November 
30, 2016 and July 20, 2017 letters.
    BIS has determined that the company's admission, in response to 
inquiries from BIS, that it made false statements to the U.S. 
Government during the probationary period under the Settlement 
Agreement and March 23, 2017 Order indicate that ZTE still cannot be 
relied upon to make truthful statements, even in the course of dealings 
with U.S. law enforcement agencies, and even with the prospect of the 
imposition of a $300 million penalty and/or a seven-year denial order. 
The provision of false statements to the U.S. Government, despite 
repeated protestations from the company that it has engaged in a 
sustained effort to turn the page on past misdeeds, is indicative of a 
company incapable of being, or unwilling to be, a reliable and 
trustworthy recipient of U.S.-origin goods, software, and technology. 
BIS is left to conclude that if the $892 million monetary penalty paid 
pursuant to the March 23, 2017 Order, criminal plea agreement, and 
settlement agreement with the Department of the Treasury did not induce 
ZTE to ensure it was engaging with the U.S. Government truthfully, an 
additional monetary penalty of up to roughly a third that amount ($300 
million) is unlikely to lead to the company's reform.
    The false statements ZTE made in the July 20, 2017 letter violate 
Section 764.2(g) of the Regulations and the terms of the Settlement 
Agreement and the March 23, 2017 Order, and thus violate the conditions 
of ZTE's probation under the Agreement and the Order. The false 
statements in the November 30, 2016 letter, made during the 
investigation, are pertinent and material in at least two ways.\4\ 
First,

[[Page 17647]]

they are evidence that ZTE's false statements to the U.S. Government 
did not cease in April 2016, as are the additional false statements ZTE 
made in its July 20, 2017 letter. Second, under Section 764.2(g) of the 
Regulations, all representations, statements, and certifications to BIS 
or any other relevant agency made, inter alia, in the course of an 
investigation or other action subject to the Regulations are deemed to 
be continuing in effect. Notification must be provided to BIS and any 
other relevant agency, in writing, of any change of any material fact 
or stated intention previously represented, stated, or certified. Such 
written notification is to be provided ``immediately upon receipt of 
any information that would lead a reasonably prudent person to know 
that a change of material fact or intention has occurred or may occur 
in the future.'' 15 CFR 764.2(g)(2) (2014-2017).\5\ Thus, with regard 
to the probationary conditions at issue here, ZTE failed to comply even 
partially with this continuing duty to correct by written notification, 
from the date of the March 23, 2017 Order until March 8, 2018.\6\
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    \4\ They are also possibly material in another way, as the 
pertinent 2016 bonus payments may not have been made until after the 
Settlement Agreement had been executed or after it had been approved 
via the March 23, 2017 Order. The November 30, 2016 letter indicated 
that 2016 bonus figures would be ``announced in March 2017.''
    \5\ Under the Regulations, ``[k]nowledge of a circumstance (the 
term may be a variant, such as `know,' `reason to know,' or `reason 
to believe') includes not only positive knowledge that the 
circumstance exists or is substantially certain to occur, but also 
an awareness of a high probability of its existence or future 
occurrence. Such awareness is inferred from evidence of the 
conscious disregard of facts known to a person and is also inferred 
from a person's willful avoidance of facts.'' See 15 CFR 772.1 
(parenthetical in original).
    \6\ As discussed supra and in the March 13, 2018 notice letter, 
ZTE did provide some notice by telephone on March 6, 2018.
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    I note that in its response to BIS's notice of proposed activation 
of suspended sanctions and in making its case for leniency, ZTE 
acknowledged that it had submitted false statements, but argued that it 
would have been irrational for ZTE to knowingly or intentionally 
mislead the U.S. Government in light of the seriousness of the 
suspended sanctions. The heart of its argument is the question, posed 
by the company in rhetorical fashion, asking ``why would ZTEC risk 
paying another $300 million suspended fine and placement on the denied 
parties list, which would effectively destroy the Company, to avoid 
sending out employee letters of reprimand and deducting portions of 
employee bonuses?'' ZTE argued that BIS should not act until the 
company completed an internal investigation so that ZTE could answer 
such questions.
    ZTE has posed such questions not because additional investigation 
could render its false statements true, but in the hope of postponing 
action by the U.S. Government and ultimately avoiding or minimizing the 
consequences of its additional violations. Similarly, additional time 
to continue its investigation is unnecessary and irrelevant to the 
issue of whether the company violated the provision against giving 
false statements to BIS under Section 764.2(g) of the Regulations, and 
in violation of the Settlement Agreement and March 23, 2017 Order. The 
reasons that ZTE violated the EAR are red herrings to BIS's concern 
that the company has repeatedly made false statements to the U.S. 
Government--as the company has now repeatedly admitted. As recently as 
March 21, 2018, in a certification to the U.S. Government signed by ZTE 
Corporation's Senior Vice President, Chief Legal Officer and Acting 
Chief Compliance Officer, ZTE admitted that it ``had not executed in 
full certain employee disciplinary measures that it had previously 
described in a letter to the U.S. government dated November 30, 2016, 
and there are inaccuracies in certain statements in the letter dated 
July 20, 2017.'' Giving ZTE additional time to complete its internal 
investigation will not erase the company's most recent--in a series--of 
false statements to the U.S. Government.
    Furthermore, ZTE's suggestion that it could or would not have made 
such a poor or irrational cost-benefit calculation, or otherwise 
assumed the risks involved, simply ignores the fact that throughout the 
U.S. Government's investigation ZTE has acted in ways that BIS would 
consider illogical and unwise. ZTE committed repeated violations of the 
Regulations and U.S. export control laws while knowing and accepting 
the most significant of liability risks, both before and after it knew 
it was under investigation. ZTE then raised the risks and stakes even 
further while under investigation by repeatedly lying to BIS and other 
U.S. law enforcement agencies and engaging in a cover-up scheme to 
destroy, remove, or sanitize evidence. The bottom line is that the 
proffered irrationality of the unlawful conduct does not excuse or 
minimize it; nor does the conduct stand alone, being part of an 
unacceptable pattern of false and misleading statements and related 
actions, as discussed above. Moreover, until BIS asked for all of the 
underlying documentation of the steps that ZTE said it had already 
taken, some of the most culpable employees faced no consequences--ZTE 
paid their bonuses and paid them in full and the employees went without 
reprimand. This is the message ZTE sent from the top.
    Based on the totality of circumstances here, I have determined 
within my discretion that it is appropriate to activate the suspended 
denial order in full and to suspend the export privileges of ZTE for a 
period of seven years, until March 13, 2025.\7\
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    \7\ This date is seven years from the date of BIS's March 13, 
2018 Notice of Proposed Activation of Suspended Sanctions and 
Opportunity to Respond in this matter.
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    It is therefore ordered:
    First, from the date of this Order until March 13, 2025, ZTE 
Corporation, with a last known address of ZTE Plaza, Keji Road South, 
Hi-Tech Industrial Park, Nanshan District, Shenzhen, China, and ZTE 
Kangxun, with a last known address of 2/3 Floor, Suite A, Zte 
Communication Mansion, Keji (S) Road, Hi-New Shenzhen, 518057 China, 
and when acting for or on their behalf, their successors, assigns, 
directors, officers, employees, representatives, or agents (hereinafter 
each a ``Denied Person''), may not, directly or indirectly, participate 
in any way in any transaction involving any commodity, software or 
technology (hereinafter collectively referred to as ``item'') exported 
or to be exported from the United States that is subject to the 
Regulations, or in any other activity subject to the Regulations, 
including, but not limited to:
    A. Applying for, obtaining, or using any license, license 
exception, or export control document;
    B. Carrying on negotiations concerning, or ordering, buying, 
receiving, using, selling, delivering, storing, disposing of, 
forwarding, transporting, financing, or otherwise servicing in any way, 
any transaction involving any item exported or to be exported from the 
United States that is subject to the Regulations, or engaging in any 
other activity subject to the Regulations; or
    C. Benefitting in any way from any transaction involving any item 
exported or to be exported from the United States that is subject to 
the Regulations, or from any other activity subject to the Regulations.
    Second, no person may, directly or indirectly, do any of the 
following:
    A. Export or reexport to or on behalf of a Denied Person any item 
subject to the Regulations;
    B. Take any action that facilitates the acquisition or attempted 
acquisition by a Denied Person of the ownership,

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possession, or control of any item subject to the Regulations that has 
been or will be exported from the United States, including financing or 
other support activities related to a transaction whereby a Denied 
Person acquires or attempts to acquire such ownership, possession or 
control;
    C. Take any action to acquire from or to facilitate the acquisition 
or attempted acquisition from a Denied Person of any item subject to 
the Regulations that has been exported from the United States;
    D. Obtain from a Denied Person in the United States any item 
subject to the Regulations with knowledge or reason to know that the 
item will be, or is intended to be, exported from the United States; or
    E. Engage in any transaction to service any item subject to the 
Regulations that has been or will be exported from the United States 
and which is owned, possessed or controlled by a Denied Person, or 
service any item, of whatever origin, that is owned, possessed or 
controlled by a Denied Person if such service involves the use of any 
item subject to the Regulations that has been or will be exported from 
the United States. For purposes of this paragraph, servicing means 
installation, maintenance, repair, modification or testing.
    Third, after notice and opportunity for comment as provided in 
Section 766.23 of the Regulations, any person, firm, corporation, or 
business organization related to a Denied Person by affiliation, 
ownership, control, or position of responsibility in the conduct of 
trade or related services may also be made subject to the provisions of 
this Order.
    Fourth, that this Order shall be served on ZTE, and shall be 
published in the Federal Register.
    This Order is effective immediately.

    Issued this 15th day of April 2018.
Richard R. Majauskas,
Acting Assistant Secretary of Commerce for Export Enforcement.
[FR Doc. 2018-08354 Filed 4-20-18; 8:45 am]
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