Trade Based Money Laundering - Merchant-Based Phantom Shipment

Revised by: Bachir El Nakib

Financial Services Businesses are not the only entities that confront money-laundering risks. Although law enforcement efforts to combat money laundering have focused primarily on the financial system, money laundering poses a threat to nonfinancial businesses as well, particularly those that engage in global trade. Trade-based money laundering (“TBML”) is “an important channel of criminal activity,”[2] and with the growth of global trade, TBML has become an attractive vehicle for moving dirty money.

Hundreds of billions of dollars are laundered globally through trade.[3] TBML is “estimated by some experts to be the largest money laundering method in use in the United States today.”[4] As international trade increasingly is being misused to transfer criminal proceeds, nonfinancial businesses that exchange goods or services across borders need to consider and take seriously the risk that seemingly legitimate trade transactions actually may be schemes for sanitizing dirty money. 

With that in mind, it would financial services business with oversight responsibility of certain credit card relationships – and potentially related third-party payment  processors and the merchant acquirers themselves, even those not subject to formal AML obligations – to start looking at credit card transactions and asking many of the same questions about if the activity could be a red flag for money laundering or the foundation of a suspicious activity report.

That would include things like:

  • Do the credit card transactions make sense or a marked change, in terms of amounts, customers or items, from historical practices?
  • Why is the merchant going international when they could get the same items domestically?
  • Why is the merchant using credit cards for large transactions involving items they normally wouldn’t buy or sell, such as a fruit seller purchasing high-end electronics?
  • Is there any hard evidence that, even though a payment was made, that an item was actually shipped?

“The reality is that merchant acquirers don’t have the same BSA/AML requirements of banks, but this doesn’t mean that if there is a valid money laundering typology that they shouldn’t collect their own intelligence.

Transnational organized crime (TOC) groups have dealt with the perennial problem of moving value across borders undetected.

At some point all of these groups deal with the three steps in the money laundering process, but the first one, placement, is potentially the most hazardous hurdle to overcome. TOCs ship drugs to the United States via various means and have their major distribution hubs sell the drugs to other dealers.

The investigative journalist and author Patrick Radden Keefe gives an interesting account of the credit-based system in the drug trafficking trade in his New York Times article “Cocaine Incorporated,” which supports the assertion that cash generated in the United States must be laundered or smuggled back to Mexico.

“As preferred customers, they often took Chapo’s drugs without putting any money down, then paid the cartel only after they sold the product.

This might seem unlikely, given the pervasive distrust in the underworld, but the narcotics trade is based on a robust and surprisingly reliable system of credit. In a sense, a cartel like Sinaloa has no choice but to offer a financing option, because few wholesale buyers have the liquidity to pay cash upfront for a ton of cocaine. “They have to offer lines of credit,” Wardrop told me, “no different from Walmart or Sears.” This credit system, known as “fronting,” rests on an ironclad assumption that in the American marketplace, even an idiot salesman should have no trouble selling drugs.”

But how do the cartels get the cash generated from drug deals which occurred on United States soil back into their possession?

There are several cash businesses methods generated by drug deals to achieve this processes by moving cross-border transactions which can be coined as “merchant-based money laundering.”

The Business-To-Business (B2B) Credit Cards payments growth

Businesses in the United States are continuing to increase their use of corporate credit cards for business-to-business (B2B) payments. According to a payments study “spending increased 25 percent – from $196 billion to $245 billion – and is forecast to continue increasing at a rate of around 10 percent – through 2018.

As well, many business credit cards offer attractive cash back reward programs so businesses are opting to pay their suppliers with a company credit card as opposed to an Automated Clearing House (ACH) transfer, check or wire.

Additionally, it is becoming more common for a business to use a company credit card to make a purchase of goods or services for tens of thousands of dollars in a single transaction.

What is a merchant?

A merchant can be defined as any business which accepts credit, debit, prepaid or gift cards as a form of payment with the assistance of a merchant acquirer.Click here to read more about merchant acquiring.


What is merchant-based money laundering?

Merchant-based money laundering can be defined as the process where goods and/or services are purchased by an individual or company from a merchant, but the goods or services are undervalued or not actually provided at all.

If the goods associated with the transaction were never actually shipped, then this could be categorized as a “phantom shipment.”

Merchant-based money laundering Red Flags

One example of merchant-based money laundering would be a cash-intensive business, such as a privately-owned supermarket located in the United States using a company credit card to make a high value purchase of goods from a Mexican merchant.

If the supermarket makes high-value purchases from the Mexican merchant on a regular basis, then it should be considered suspicious if one or more of the following criteria are met:

Ø  The goods purchased are not likely to be resold in a supermarket, i.e. high end electronics, jewelry, etc.

Ø  It’s possible to purchase similar products at comparable prices from another merchant located within the United States.

Ø  The supermarket doesn’t usually use its company credit card to purchase other items it routinely sells, i.e. meat, produce, dairy, etc.

The below graphic shows some common cash-intensive business examples, but this list is not all inclusive.  Click here to read more on cash-intensive businesses

 Furst one


What would merchant-based money laundering look like?

Merchant-based money laundering would typically follow this high-level flow:

  1. TOC groups ship drugs to the US: This step assumes that the TOC will ship drugs on credit and collect the cash at some point in the future. Additionally, the TOCs usually have their own people reselling the drugs to other dealers in the US.


2.  Bulk cash generated from drug sales: The TOC’s representatives sell the drugs to other dealers and now have a lot of cash which must be laundered or shipped in bulk back to Mexico.


3.  Cash distributed: The TOC’s representatives in the US use their local connections to form a network of alliances with cash-intensive businesses in the area where the group operates. The cash-intensive businesses are persuaded with a fee or are coerced into receiving regular deliveries of cash.


4.  Illicit cash commingled with regular cash deposits and restaurant collects a fee from TOC: The cash-intensive business takes the cash delivery from the TOC and deposits it with the company’s regular cash deposits over a period of time. The cash-intensive business is able to collect a fee for each cash delivery.


5.  Restaurant purchases goods from Mexican merchant with company credit card: The cash-intensive business is instructed by the TOC to make regular purchases from specific merchants located in Mexico on a regular basis.


6.  Phantom shipment (no goods actually shipped): The Mexican merchant receives the order from the cash-intensive business located in the United States. However, since the TOC has instructed both the cash-intensive business and the Mexican merchant of the process, no goods are actually shipped.

 Furst 2

The above graphic simply illustrates that there are other innovative ways for TOCs to transfer value across borders.

The money laundering process doesn’t stop with the Mexican merchant, but the TOCs successfully passed the first step in the money laundering process by distributing cash to various businesses by converting cash deliveries into a bank deposit through the use of business credit cards.

The merchant acquirer processes the payments, but the merchant’s bank is the institution that deposits the money into the merchant’s account, so the acquirer could see itself more as a processing agent than a financial institution.

To a certain extent this is true, but the merchant acquirer will have access to data that the merchant’s bank won’t have and this data could contain money laundering typologies which should be monitored more closely. The merchant acquirer also tends to be more focused on chargebacks because this is the financial exposure of the acquirer and what could lead to a loss.

Why go to all of this trouble?

Some may be asking themselves why would the TOCs go to all of this trouble to launder their money through a merchant when they can simply have the U.S.-based cash-intensive business send a wire to Mexico?

This is a valid objection, but one way to think about the benefits of merchant-based money laundering to the TOCs, as opposed to simply sending international wires, is the level of risk associated with each type of transaction from a financial institution’s point of view.

Most financial institutions will categorize international wires as high-risk, but credit card and merchant acquiring activity will not fall into the same anti-money laundering (AML) risk category.

  • If you were planning to drive a sports car over the speed limit, would you drive on a road where you knew the police were waiting with their radar guns or would you take a back road which was not as heavily policed?


So what now?

Merchant acquirers and credit card companies should be aware that TOCs and other criminal groups can use their financial products to move value across borders.

While the cash is still being deposited into a bank account, the merchant acquirer and credit card company will have access to data that the merchant’s bank doesn’t.

If a business’ cash deposits increase, how could the bank determine that the increase was generated from illicit sources as opposed to legitimate business revenue?

The answer is that they can’t.  The red flags may only be contained in the business’ credit card activity and with the merchant acquirer and only then will it become clear that the high value credit card purchases didn’t make business sense.

Trade-Based Money Laundering Methods

TBML is “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”[9] Like money laundering through the financial system, TBML may occur in three stages. At the placement stage, the offender transforms illicit proceeds into a transferable asset (e.g., by purchasing goods); at the layering stage, the offender attempts to obscure the link between the illicit proceeds and their criminal source (e.g., by trading the goods across borders); and at the integration stage, the offender re-introduces the illicit proceeds into the legitimate economy (e.g., through resale of the goods). There are four basic TBML methods: (1) over- and under-invoicing; (2) over- and under-shipments; (3) falsely describing goods or services; and (4) multiple invoicing of goods or services.

Imagine the following scenarios involving Company X, a manufacturer based in Houston that supplies electronics to distributors throughout the world, including Company Y based in Dubai:


Company X ships 10 computers to Company Y worth $1,000 each, but invoices Company Y for 10 computers worth $2,000 each. Company X pockets the $10,000 difference between the invoiced price and the “fair market” price, which constitutes the proceeds of crime. This scheme gives Company Y an ostensibly legitimate reason to wire $20,000 to Company X, including an extra $10,000 of dirty money that has been laundered into clean funds.


Company X ships 10 computers to Company Y worth $1,000 each, but invoices Company Y for 10 computers worth $500 each. Company Y wires $5,000 to Company X, then resells the computers to a retailer for $10,000, pocketing $5,000 of criminal proceeds. This scheme allows Company X to transfer value overseas to Company Y, and both companies to point to apparently plausible trades to justify the transaction.

Trade Diversion

Company X sells $1,000,000 worth of 3-D printers to Company Y at a 50 percent discount to open up a market in Dubai. This is the first time that Company X has done business with Company Y, and Company X is unaware that Company Y is a front company for a criminal organization. Company Y pays the $500,000 invoice through a letter of credit, has the 3-D printers shipped to an intermediary in Turkmenistan, and causes the 3-D printers to be diverted back to the United States, where they are sold for $750,000. Company Y receives the $250,000 profit as seemingly legitimate, clean funds.

Additionally, Company X might overstate or understate the quantity of goods shipped or services delivered to Company Y, and in extreme cases, might not provide any goods or services at all despite invoices stating otherwise (making a so-called “phantom shipment”). Similarly, Company X might misrepresent the type or quality of goods shipped or services delivered, transferring more or less value than that stated on the commercial invoice. Alternatively, Company X might invoice the same goods or services more than once to justify multiple payments for the same shipment of goods or delivery of services.

There are also numerous variations of these basic TBML methods. In one case reported by the Financial Action Task Force (“FATF”),[10] a Norwegian company purchased goods from a German company and directed that the goods be delivered to a branch of the Norwegian company in the Balkans. The German company sent the Norwegian company an invoice, which was settled by a wire transfer. The Norwegian company then sent its Balkan affiliate a significantly higher invoice, including several inflated administrative costs. The Balkan affiliate settled the invoice by depositing cash, presumably the proceeds of crime, into the Norwegian parent’s bank account. This scheme allowed the Norwegian company to significantly inflate the value of the goods, facilitating the movement of value from the Balkan affiliate to its own coffers.


The typical TBML scheme, therefore, involves collusion on both sides of the import-export transaction and the transfer of value across borders. But, as illustrated, a company can be an unsuspecting participant in a TBML scheme, particularly where multiple parties (e.g., freight forwarders) or countries are involved in the transaction. TBML is especially risky because it is closely tied to a host of other types of violations, such as violations of U.S. export control and sanctions laws, as well as the U.S. Foreign Corrupt Practices Act. For instance, in the trade diversion example above, suppose the 3-D printers are shipped through Iran en route to the United States. Or, suppose Company Y is 50 percent owned by Company Z, a technology firm owned or controlled by the government of Iran. In either of these instances, Company X would be prohibited from doing any business with Company Y, and could face exposure under U.S. export controls and sanctions laws for its conduct. Therefore, the scope of liability arising from TBML schemes may be wide-reaching.

Legal Framework

The United States has a myriad of AML laws and regulations.[11] The cornerstone of the federal AML framework is the BSA, enacted in 1970, requiring financial institutions to file reports and maintain records to assist law enforcement in detecting and preventing money laundering. Additionally, the Money Laundering Control Act (“MLCA”), enacted in 1986, made money laundering a federal crime for the first time in U.S. history. Another linchpin in the federal AML framework is the Patriot Act, enacted in the wake of the Sept. 11, 2001, attacks, which amended and enhanced the BSA and MLCA.

Primary responsibility for administering and enforcing the BSA belongs to the U.S. Department of the Treasury, much of it delegated to the Financial Crimes Enforcement Network, a Treasury bureau. Other Treasury agencies involved in AML efforts include theInternal Revenue Service and its Criminal Investigation Division, and the Office of Foreign Assets Control. Various other agencies play critical roles in AML efforts, including the U.S. Department of Justice, which is responsible for prosecuting money laundering crimes, and the U.S. Customs and Border Protection within the U.S. Department of Homeland Security. The key AML laws administered and enforced by these agencies are outlined below.


Title I of the BSA[12] authorizes the Treasury to require financial institutions to maintain records of customer transactions. Title II of the BSA[13] authorizes the Treasury to require financial institutions and, in some instances, nonfinancial businesses to (1) file reports on transactions that are of potential interest to law enforcement, (2) maintain related financial records, and (3) implement AML programs and compliance procedures. The main reports required by the BSA are Currency Transaction Reports, Suspicious Activity Reports, Reports of International Transportation of Currency or Monetary Instruments, and Reports of Foreign Bank and Financial Accounts.[14]

There are criminal penalties for willful violations of the BSA and its implementing regulations,[15] and for structuring transactions to evade BSA reporting requirements.[16] For example, a person who willfully violates the BSA or its implementing regulations is subject to a criminal fine of up to $250,000 or five years in prison, or both.[17] A person who commits such a violation while violating another U.S. law, or engaging in a pattern of criminal activity, is subject to a fine of up to $500,000 or 10 years in prison, or both.[18]

Additionally, the federal banking agencies and FinCEN can bring civil money penalty actions for violations of the BSA.[19] Furthermore, officers, directors and other individuals may be removed from office for a violation of the AML laws under Title 31 of the U.S. Code, as long as the violation was not inadvertent or unintentional.[20]


Sections 1956 and 1957 of the MLCA make it a felony to conduct certain financial transactions involving dirty money, including transactions designed to conceal or disguise the source, nature, location, ownership, or control of the dirty money, or to facilitate another crime. Legitimate businesses that allow themselves, even unintentionally, to be used as conduits for TBML may be subject to serious criminal and civil penalties under the MLCA, and therefore, should be aware of their obligations under the MLCA and take steps to ensure compliance with such obligations.

Section 1956 prohibits certain transactions involving the proceeds of “specified unlawful activities” (“SUAs”),[21] interstate or international transfers of money, and “sting money.”[22] Specifically, it prohibits:

  • financial transactions[23] involving SUAs committed or attempted (1) with the intent to promote further predicate offenses; (2) with the intent to evade taxation; (3) knowing the transaction is designed to conceal laundering of the proceeds; or (4) knowing the transaction is designed to evade AML reporting requirements;[24]
  • the international transportation or transmission (or attempted transportation or transmission) of funds (1) with the intent to promote a predicate offense; (2) knowing that the purpose is to conceal laundering of the funds and knowing that the funds are the proceeds of a predicate offense; or (3) knowing that the purpose is to evade reporting requirements and knowing that the funds are the proceeds of a predicate offense;[25] and,
  • financial transactions (or attempted transactions) that the defendant believes involve the proceeds of a predicate offense and that are intended to (1) promote a predicate offense, (2) conceal the source or ownership of the proceeds, or (3) evade reporting requirements.[26]

Section 1957 prohibits monetary transactions [27] involving criminally derived property[28] of a value greater than $10,000 that is derived from SUA. Unlike its companion provision, Section 1957 does not require a finding of promotion, concealment or evasion; rather, it makes it a separate crime to simply spend, deposit, transfer, exchange or withdraw tainted money through the use of a financial institution.

Violations of these criminal code sections can result in penalties of up to 20 years’ imprisonment and fines of up to $500,000 or twice the value of property involved in the money laundering transaction, whichever is greater. Civil penalties also may be imposed up to the greater of $10,000 or the value of the property involved. Further, any property (or proceeds) involved in a violation or traceable to property (or proceeds) involved in a violation is subject to confiscation under civil or criminal procedures.[29]

The Patriot Act

Title III of the Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, amends and enhances the BSA and MLCA. The key provisions of this title include: Section 365, requiring nonfinancial businesses to file a report (Form 8300) regarding currency received in the course of the trade or business;[30] Section 371, creating a new criminal offense of “bulk cash smuggling;”[31] Section 352(a), requiring financial institutions to establish an AML program;[32] Section 326(a), calling for the Treasury to adopt regulations requiring financial institutions to establish customer identification programs;[33] and Section 311, authorizing the secretary of the Treasury to adopt “special measures” for foreign jurisdictions, financial institutions, or “primary money laundering concerns.”[34] Offenders may face substantial civil and criminal penalties, as described above. [35]

Detecting and Mitigating TBML Risk

U.S. banking regulators and the FATF have identified certain red flags for TBML, including the following:

  • Significant discrepancies between the description of the goods on the bill of lading and the invoice
  • Significant discrepancies between the description of the goods on the bill of lading or invoice and the actual goods shipped
  • Significant discrepancies between the value of the goods reported on the invoice and the fair market value of the goods
  • Documentation showing a higher or lower value or cost of merchandise than that declared to customs or paid by the importer
  • Shipment locations, shipping terms, or description of goods not consistent with letter of credit
  • Customer significantly deviates from regular business activities
  • Customer conducts business in or ships items through high-risk jurisdictions
  • Customer engages in potentially high-risk activities, e.g., trade in defense articles or services, chemicals, sensitive technical data, and crude oil
  • Commodity being shipped is among those designated as “high risk” for money laundering activities, e.g., high-value, low-volume goods with high turnover rates that present valuation difficulties
  • Commodity is shipped to (or from) a jurisdiction designated as “high risk” for money laundering activities
  • Commodity is transhipped through one or more jurisdictions for no apparent economic reason
  • Commodity being shipped appears inconsistent with the customer’s regular business activities
  • Size of the shipment appears inconsistent with the scale of the customer’s regular business activities
  • Shipment does not make economic sense, e.g., the use of an oversized container for a small volume of goods
  • Method of payment appears inconsistent with the risk characteristics of the transaction, e.g., the use of an advance payment for a shipment from a new supplier in a high-risk country
  • Receipt of cash (or other payments) from third-party entities that have no apparent connection with the transaction
  • Request to pay proceeds to unrelated third-party entities that have no apparent connection with the transaction
  • Use of repeatedly amended or frequently extended letters of credit
  • Use of front (or shell) companies
  • Transaction structure appears unnecessarily convoluted

Nonfinancial businesses involved in international trade should be acutely aware of these red flags. Although they are not presently required to implement an AML compliance program, doing so may go a long way toward mitigating TBML risk. Such a program should include the development of policies and procedures tailored to the company and designed to capture relevant information about customers, transaction parties, and transactions. As part of due diligence, companies should (1) review transaction documents for red flags; (2) screen the party names against government blacklists; and (3) conduct more extensive background checks as necessary.

A key focus of due diligence should be identifying and monitoring transactions outside the ordinary course of business and detecting the involvement of all transaction parties and beneficiaries. The AML compliance program should also include Ongoing training, mechanisms for reporting suspicious transactions, recordkeeping and retention, designation of an AML compliance officer, and independent testing of the program


* Keith Furst, founder of Data Derivatives

 Kimberly Caine, Norton Rose Fulbright

[1] John Zdanowicz, quoted in “Money Launderers Wash Billions through International Trade,” Miami Herald, May 2009,

[2] Financial Action Task Force, Trade Based Money Laundering (June 23, 2006),; see also Asia/Pacific Group on Money Laundering, APG Typology Report on Money Laundering (July 20, 2012),

[3] United States Department of State, Bureau for International Narcotics and Law Enforcement Affairs, International Narcotics Control Strategy Report Volume II: Money Laundering and Financial Crimes (2009),

United States Senate Caucus on International Narcotics Control, The Buck Stops Here: Improving U.S. Anti-Money Laundering Practices (April 2013),

[5] President’s Commission on Organized Crime, Interim Report to the President and Attorney General, The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering (1984).

[6] Bank Secrecy Act of 1970, Pub. L. No. 91-508, 84 Stat. 1118 (Oct. 26, 1970), 12 U.S.C. §§ 1951-59, as amended, and 31 U.S.C. §§ 5311-32, as amended.

[7] USA PATRIOT Act of 2001, Pub. L. 107-56, codified in scattered sections of the U.S. Code. Other laws include the Anti-Drug Abuse Act of 1988, the 1992 Annunzio-Wylie Anti-Money Laundering Act, the 1994 Money Laundering Suppression Act, the 1998 Money Laundering and Financial Crimes Strategy Act, and the Intelligence Reform and Terrorism Prevention Act of 2004. Additionally, the Financial Action Task Force has developed “soft law” recommendations concerning money laundering. See Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (February 2012),

[8] Other methods of money laundering, not discussed herein, are the use of alternative banking systems, such as hawala, and the physical movement of currency (e.g., bulk cash smuggling).

[9] Financial Action Task Force, Best Practices on Trade Based Money Laundering (June 20, 2008),

[10] Financial Action Task Force, Trade Based Money Laundering (June 23, 2006), supra note 2, at 17.

[11] This article does not address the various state AML laws.

[12] 12 U.S.C. §§ 1829b & 1951-1959.

[13] 31 U.S.C. §§ 5311-5332.

[14] Nonfinancial businesses are required to file reports of cash payments over $10,000 received in a trade or business (Form 8300), reports of foreign bank and financial accounts (“FBARs” or TD F 90.22.1), and reports of international transportation of currency or monetary instruments (“CMIRs” or FinCEN Form 105).

[15] See 31 U.S.C. § 5322.

[16] See 31 U.S.C. § 5324(d).

[17] See 31 U.S.C. § 5322(a).

[18] See 31 U.S.C. § 5322(b).

[19] See 12 U.S.C. §§ 1818(i) and 1786(k), and 31 U.S.C. § 5321.

[20] See 12 U.S.C. § 1818(e)(2). For additional discussion, see the BSA page on the FinCEN website,

[21] “Specified unlawful activity” is defined in the MLCA to encompass over 200 predicate offenses, including various forms of fraud, public corruption, and other commonly prosecuted federal, state, and foreign crimes. See 18 U.S.C. § 1956(c)(7).

[22] “Sting money” is money that is not really criminal proceeds but is represented as such by a law enforcement officer.

[23] “Financial transaction” is defined as either (A) a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means, (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel, or aircraft, or (B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree. 18 U.S.C. §§ 1956(c)(4)(A), 1956(c)(4)(B).

[24] § 1956(a)(1).

[25] § 1956(a)(2).

[26] § 1956(a)(3).

[27] “Monetary transaction” is defined as “the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument 26…by, through, or to a financial institution.” 18 U.S.C. § 1957(f)(1).

[28] “Criminally derived property” is defined as “any property constituting, or derived from, proceeds obtained from a criminal offense.” 18 U.S.C. § 1957(f)(2).

[29] See 18 U.S.C. §§ 1956(a), (b)(1); 1957(b). For additional discussion regarding the MLCA, see Congressional Research Services Report for Congress, Money Laundering: An Overview of 18 U.S.C. 1956 and Related Federal Criminal Law (Feb. 8, 2012),

[30] 31 U.S.C. § 5331.

[31] 31 U.S.C. § 5332. Bulk cash smuggling is committed by anyone who, with the intent to evade reporting requirements, knowingly conceals more than $10,000 in currency or other monetary instruments on his or her person or luggage and transports or attempts to transport it.

[32] 31 U.S.C. § 5318(h).

[33] 31 U.S.C. § 5318(l).

[34] 31 U.S.C. § 5318A.

[35] For additional discussion, see the USA PATRIOT Act page on the FinCEN website, available at




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