Part 2: Chronology of events

Cambridge High School's management of conflicts of interest in relation to Cambridge International College (NZ) Limited.

2.1
In this Part, we describe the events from September 2001 – when the College was first proposed – to the middle of 2004. We have included comment where necessary to explain the relevance of the events. We also discuss information provided to the School’s appointed auditor4 that was relevant to our inquiry.

2.2
The description of events is not complete because:

  • The documentation of the decision-making process was not of the standard we would have expected, and it is possible that not all relevant documents were available to us; for example, in relation to the establishment of Cambridge Class Limited.
  • Mrs Annan, who was the Principal of both the School and the College at the time of the events, refused to provide explanations to us for some matters relevant to the inquiry.

2.3
The sequence of events falls into 4 distinct periods. We discuss these as follows:

Original proposal (September 2001 to June 2002)

2.4
The School has been active in enrolling overseas students for a number of years. It has used a recruitment agent to help enrol students from China.

2.5
In the middle of 2001, the recruitment agent approached the School to explore ways of improving the academic success of the Chinese students that he had introduced, so that they were more likely to gain university entrance qualifications. His initial proposal was for the School to establish a special class for Chinese students, in which they would be expected to study harder and longer.

2.6
After discussions with Mrs Annan, as the School’s Principal, and her husband Mr Annan, as the School’s Director, International Student Programme, the recruitment agent proposed a joint venture to establish a separate school in its own right, rather than a special class for Chinese students in the School.

2.7
In September 2001, a number of members of the Board and the Annans met the recruitment agent to discuss the proposal for a joint venture. The proposal was that the recruitment agent would establish a private school and hostel for Chinese students in Cambridge. The School would provide staffing and teaching for 100 students initially, increasing to 300 or more. There would be financial incentives for the School, which would continue to enrol a number of Chinese students. Later that month, the Board agreed to the proposal in principle.

2.8
Mrs Annan then briefed the Minister of Education about the proposal in writing, saying that the School would provide teaching and other services for a projected roll of 300 students within 2 years. The School would cover all its costs and make a healthy profit. The Minister replied in October 2001, outlining matters for the School to consider and advising caution before entering into any arrangement.

2.9
On 16 October 2001, Mrs Annan advised the School’s Resources Committee that another meeting had been held with the recruitment agent and that he had obtained funding for the College project. He was now seeking information on what income the School would expect from the venture.

2.10
Mrs Annan summarised for the Resources Committee the types of additional costs the School would need to recover for the services it would provide, including 1.5 teachers for the first intake, administration costs, and payment for senior staff involved in managing the project. The monetary return for the School for the use of its name and expertise was suggested to be about $100,000 a year.

2.11
The senior staff who were to be paid for managing the project would have included the Annans. This is the first indication of a financial interest, and therefore of a conflict of interest, on the part of Mrs Annan and other senior staff. In relation to Mrs Annan’s position as a trustee, clause 8(8) of Schedule 6 of the Act specifies that a trustee who has a financial interest in a matter must be excluded from any meeting of the Board while it discusses, considers, or decides the matter.

2.12
To comply with the requirements of the Act, Mrs Annan, in her capacity as a trustee, should have declared her financial interest in the proposal and been excluded from the meeting once she had given all the information that the Board required. Mrs Annan told us that the Board knew of her interest. However, she did not declare her interest, as she was legally required to do, and she was not excluded from the meeting.

2.13
After the meeting, Mrs Annan wrote to the recruitment agent confirming the services and facilities that the School could provide, and agreeing that the School’s name could be used for promotional purposes.

2.14
The letter noted the need for a contract on the financial arrangements between the Board and the College. These were to cover the costs of staffing, administration, resources, and management, and a payment to the School for the use of its name and expertise.

2.15
The letter also noted that the recruitment agent had been given a rough verbal estimate. Mrs Annan told us that she could not recall the amount of the estimate that she gave to the recruitment agent.

2.16
The letter said that the School would not want its auditors involved with the College. Mrs Annan maintained this was the view of the Board, but we did not see a Board minute confirming this position.

2.17
The recruitment agent told us that he recalled that it was agreed only in principle that he would make a payment for use of the School’s name and expertise. The only amount he recalled being discussed was $25,000 for the School’s help with the College’s accreditation. He had no recollection of any discussions involving payment of $100,000 a year to the School.

2.18
On 13 November 2001, the College was incorporated, with the recruitment agent as the sole director, and part-owner with another person. (We refer to the recruitment agent as “the agent-owner” in the rest of this report.)

2.19
None of the people directly connected with the School, including the Annans, had an ownership interest in the College.

2.20
In February 2002, the School’s solicitor provided written advice to the Board about the proposal. The advice said that the benefit to the College of the arrangement with the School (including use of its name and expertise) would be credibility, a strong brand, and access to expertise. The advice recommended that the best form of arrangement would be a contract for services. The solicitor advised caution, and that the Board should obtain the consent of the Ministry.

2.21
In March 2002, Mrs Annan wrote to the Minister of Education’s office to seek advice on how to obtain approval for the proposal. An annual payment to the School of $100,000 was mentioned, in addition to recovery of costs. The School’s Resources Committee noted at a meeting on 14 March 2002 that Mrs Annan was working on a proposal to go to the Ministry.

2.22
Also in March 2002, Mrs Annan provided the School’s solicitor with further information on the proposal. The School would enter into a contract for services, to supply teaching and curriculum and qualifications knowledge. There was to be an additional contract for use of the School’s name and expertise, estimated at $100,000 a year, payable in advance. The services for the additional contract were to be supplied on behalf of the Board by the Principal and the Director, International Student Programme – the Annans.

2.23
Mrs Annan told us that she could not recall how it was envisaged that the $100,000 a year would be spent, and said that how much she and Mr Annan would be paid was never discussed and was a matter for the Board.

2.24
In April 2002, the Annans visited Japan, China, and Hong Kong for marketing purposes on behalf of the School. Mrs Annan reported to the Board about meetings held in China with the agent-owner, to ensure that Chinese schools would be “feeding” students to the College. The agent-owner would require the Annans to visit China again. The Board noted that Mrs Annan was satisfied that the College was “a very solid project” for the School.

2.25
Also in April 2002, Mrs Annan gave the Minister of Education’s office a further written briefing on the proposal. She mentioned her recent trip to China, the contract for services between the School and the College, and the proposal being a long-term source of revenue for the School.

2.26
On 20 June 2002, Mrs Annan wrote to the School’s solicitor saying the Board would have a draft proposal to him from the agent-owner’s solicitor shortly.

2.27
At this point, neither of the Annans had received any remuneration from the College. Mrs Annan was Foundation Principal of the College and was due to receive $5,000 for her work in obtaining a private school licence for the College (see paragraph 2.36).

Change in the proposal (June to August 2002)

2.28
At some point between 20 June and 15 August 2002, the proposal changed.

2.29
The original proposal was for the School to provide a full educational service to the College, in return for an annual payment of $100,000 in addition to costs.

2.30
The revised proposal was for the College’s educational services to be provided by a new company – Cambridge Class Limited – that would be owned partly by the Annans, with the School providing a limited range of services.

2.31
As an indication of the scale of the change, we have estimated that, under the original proposal, the School would have received income of about $340,000 a year – based on 60 students. Under the revised proposal, the School would have received income of only about $12,000 a year – based on 60 students at $200 each.

2.32
We have not been provided with any documentation to explain the change in the proposal or the establishment of Cambridge Class Limited.

2.33
The recollections of the main people involved were:

  • The agent-owner told us that the idea for the change came from Mrs Annan. He did not have a preference whether the College received its educational services from the School or from a separate company owned partly by the Annans.
  • The College’s then Deputy Principal told us that Mrs Annan enquired about his interest in pursuing a business venture providing educational services to the College. Subsequently she asked for his help with the registration of the College as a private school. He told us that he never had any documentation about Cambridge Class Limited before the new company was incorporated on 9 September 2002.
  • The Board’s Chairperson told us that the Board came to the view that there was a legal impediment to it being involved in both the School and the College. Also, it was not keen on providing the full educational service to the College, given other issues at the School that needed to be resolved. The Chairperson did not recollect any documents outlining the Board’s concerns and decisions. The first time the Chairperson heard about Cambridge Class Limited was on a declaration of interests form signed by Mrs Annan in February 2003. The Chairperson also told us that the Board did not know that the College was using the School’s name for promotional purposes. The Chairperson expressed the view to us that the Board was not sufficiently well informed about the College and Cambridge Class Limited.
  • Mr Annan told us that he had no involvement in the decision to change the proposal. He could not remember when the concept of Cambridge Class Limited was first suggested, but it was clear to us that it was not his idea. He did not know if there was any documentation on the creation of Cambridge Class Limited. We formed the view that Mr Annan was not instrumental in changing the nature of the proposal or the creation of Cambridge Class Limited.
  • Mrs Annan told us that the decision not to proceed with the original proposal was made in discussion with a number of Board members, and was as a result of legal and practical difficulties. She could not recall when the discussions took place and said there was no documentation on the decision. Mrs Annan told us that she believed the Board was aware of the School’s name being used by the College for promotional purposes.
  • In relation to Cambridge Class Limited, Mrs Annan did not recall when the concept was first suggested. She also told us that, if she did have any documentation explaining the creation of Cambridge Class Limited, she would regard it as being private and not relevant to an inquiry about whether she had a conflict of interest. She confirmed that the Board was not involved in the creation of Cambridge Class Limited.

2.34
We have not been able to draw any conclusions on the reason for the change, as we have not been provided with any documentation on the matter.

Registration of the College

2.35
Also during this period, in late July 2002, the School received $25,000 inclusive of GST ($22,222 net) from the College to fund work associated with applying for registration of the College as a private school under the Act.

2.36
Of this amount, the School paid an employee of the School $8,000 and Mrs Annan $5,000 for their work in obtaining a private school licence for the College. Legal costs were about $5,000. The School retained the balance of about $4,200.

Revised proposal (August 2002 to December 2002)

2.37
On 15 August 2002, the School’s Resources Committee considered a written report from Mrs Annan for funding for the Annans to accompany the agent-owner on a proposed overseas marketing visit. Mrs Annan was not present at the meeting.

2.38
The report said a long-term partnership was planned between the College and the School for mutual benefit. The annual income from the arrangement for the College’s students to access the School’s facilities after school hours would “realistically” be $25,000 to $30,000. The report made no mention of the annual payment of $100,000 for use of the School’s name and expertise.

2.39
Mrs Annan told us that she did not mention in the report that the College was to receive its educational services from Cambridge Class Limited, as she believed that it had nothing to do with the School.

2.40
The income of $25,000 to $30,000 a year quoted in the report equates to 125 to 150 students at $200 a student. In our view, this was an unrealistic number of students to expect the College to attract in its first years.

2.41
In August 2002, the College submitted its application to the Ministry for registration as a private school. The application described Mrs Annan as the Foundation Principal, and was signed by Mrs Annan and others as “a true statement of the current status and planned intentions of Cambridge International College”.

2.42
One section of the application listed 19 names as the College’s “Prospective Pupils”, which included 5 from the School.

2.43
The application made frequent reference to a partnership agreement and contract for services with the School in relation to items such as teaching physics, the library, computer suite, science laboratories, professional development support, and training of staff. At the time of the application, or subsequently, there was no partnership agreement or contract for services between the College and the School. In August, the School’s solicitor wrote to the Board, noting that the Board was to provide its instructions for the solicitor once the College’s solicitor had formulated an agreement.

2.44
In September 2002, the Ministry approved the College’s application for provisional registration as a private school under Section 35A of the Act, with effect from 1 December 2002.

2.45
An e-mail of 27 August 2002 from Mrs Annan to a marketing company in China said that the College course “will guarantee university entrance requirements are met in the curriculum in one year”. The e-mail also said: “In a conventional school such as Cambridge High, achieving university entrance in one year is unrealistic.”

2.46
On 9 September 2002, Cambridge Class Limited was incorporated with the Annans and 2 other people as the shareholders and directors. We have not been provided with any documentation before this date that mentions Cambridge Class Limited.

2.47
On 16 September, Mrs Annan wrote to the Ministry advising that “my Board has sanctioned my additional, but limited, employment by the College”. She also confirmed that the Board was in the process of establishing an agreement with the College for access to the library, and the science and computer laboratories, after school hours at a cost of $200 a student a year. We note that this agreement was never established.

2.48
On 18 September, the draft heads of agreement between Cambridge Class Limited and the College provided for a fixed amount for each student for 60 students and, if the number of students was below 60 in the first year only, then for both parties to renegotiate in good faith to make the combined enterprise viable for that year.

2.49
One of the conditions of the draft agreement was for the College to contract with the School to provide Cambridge Class Limited with access to some School facilities at an annual fee of $200 a student.

2.50
The Board Chairperson told us she could not recall any discussions on the amount of the fee ($200 a year) to be charged to the College for the limited range of services.

2.51
On 17 October 2002, Mrs Annan advised the School’s Resources Committee that the College had received approval to be established as a private school. As an interim measure, the School would approve student admissions and act as an agent for tuition funds. In November, the School began offering places for College students.

2.52
The School’s Resources Committee minutes also noted that–

Formal contracts, based on a per student fee, are nearly ready for signing and one of the conditions is that there would be access to school facilities after hours.

2.53
We had formed the view that the draft contracts referred to as being nearly ready for signing were those between the College and Cambridge Class Limited. This is because no-one that we spoke to, with the exception of Mrs Annan, recalled a contract between the School and the College ever having been drafted. However, Mrs Annan was adamant that the contracts she had been referring to were those between the College and the School. She told us that she did not recall seeing such a draft contract specifically. The agent-owner did not recall any contract between the College and the School being drafted at any stage.

2.54
On 27 November 2002, Mrs Annan reported to the School’s Personnel Committee that she would be entering into a formal contract with the College, which would be secondary employment for her.

2.55
The report said that her aim was to ensure that there was an advantage to the School. She expressed the view that there would not be a conflict of interest, as the connection was likely to be of benefit to the School, in the short and long term.

2.56
The minutes of the Committee meeting note that Mrs Annan gave an assurance that, if any conflict of interest did arise, it would be addressed immediately.

2.57
Mrs Annan’s comment about the connection likely to be of benefit to the School demonstrates a lack of understanding of the nature of a conflict of interest. The possible existence of a benefit to the School did not remove the conflict of interest that existed between Mrs Annan’s role as the senior officer of the School and her financial interest in the College as the part-owner of the supplier of the College’s educational services.

Overseas marketing visit (in September 2002)

2.58
The report of 15 August 2002 to the School’s Resources Committee mentioned that the agent-owner had asked if the Annans could visit China to assist him with marketing. The agent-owner was to pay for accommodation and meals at a cost of $2,760. The School was to meet the estimated cost of the flights of $10,200, which was more than the School’s remaining marketing budget of $7,300.

2.59
The Resources Committee agreed to pay the shortfall of $2,900. The justification for the School paying for the flights was that Mrs Annan was confident that the partnership with the College would be a lucrative long-term prospect for the School, and that some marketing would also be carried out for the School. It was also noted that not all of the $25,000 received from the agent-owner for work on the private school licence had been spent. The agent-owner confirmed that his understanding was that the Annans would also be promoting the School.

2.60
The Annans’ trip to China was from 19 to 29 September 2002, with a 3-day stopover in Singapore on the return journey. The actual cost of the flights was $9,864 and was paid by the School. The agent-owner paid for the accommodation and other expenses in China. The School met other expenditure of $550. Mr Annan has confirmed that he paid for the accommodation on the Singapore stopover.

2.61
An e-mail of 19 August from Mr Annan to a marketing firm in China said –

The seminar and promotion (in September 2002) is mainly the College because the School roll for next year is full however we can speak to prospective students, but primarily we are promoting the College.

2.62
We understand that 2 students may have been enrolled for the School as a result of the visit.

2.63
At our interview with Mrs Annan, she said that the amount of marketing carried out for the School and the College on the trip was proportionate to the costs incurred by the 2 parties. This would imply about 20% for the College and 80% for the School.

2.64
Mr Annan’s record of the trip indicates that there was some marketing for the School, but much of the visit appears to have been related to the College, in particular, establishing a school for years 11 and 12 in China to prepare the students for coming to the College for year 13.

2.65
The record of the trip also notes that –

If they can persuade year 12 students to go to the College, then we can replace with new students.

2.66
We asked Mr Annan about this comment as we considered that it might have referred to the School’s year 12 students being persuaded to go to the College, and then the School replacing them with new students. We did not receive a satisfactory explanation on the matter.

Arrangement that was put in place (from December 2002 onwards)

2.67
On 6 December 2002, a heads of agreement between the College and Cambridge Class Limited was signed. The Cambridge Class Limited signatories included the Annans.

2.68
The provision relating to the use of the School’s facilities had been deleted from the agreement. The agent-owner told us that he and Mrs Annan agreed to delete the clause because they had concluded that the College would not need the facilities of the School, and that it was not necessary to incur the additional cost.

2.69
Mrs Annan told us that the School’s Resources Committee made the decision to delete the reference to the School’s facilities, but she could not recall the date of the meeting. We have not seen any minute confirming a decision by the School’s Resources Committee. Moreover, 6 months later, the School informed the Ministry and the School’s auditor that the proposal was still being considered.

2.70
We have not formed a view as to whose recollection is more likely to be correct.

2.71
Mrs Annan provided us with a copy of a letter dated 14 January 2003 to the Chairperson of the School, declaring her intention to undertake 2 private business ventures. One was Cambridge Class Limited, which was said to be involved with the supply of professional educational and curriculum materials and services.

2.72
The letter said that the venture would not interfere with Mrs Annan’s duties at the School. It did not mention that Cambridge Class Limited was providing educational services to the College. This notification was 4 months after Cambridge Class Limited was established. The School’s copy of this letter could not be located.

2.73
The New Zealand Qualifications Authority (NZQA) analysis report of 12 February 2003 on the accreditation of the College noted that–

…it has a Contract for Services with the School and this is a significant component in the work of the College. The contract includes access to the School’s library, science and computer laboratories, and gymnasium after normal school hours. College students may also join regular classes at the School.

2.74
The NZQA relied on Mrs Annan’s certification, and, on 20 February 2003, formally accredited the College.

2.75
On 20 February 2003, Mrs Annan submitted a conflict of interest declaration form to the Chairperson of the Board. It referred to her being a shareholder of Cambridge Class Limited, with a business of “writing and selling curriculum materials for teaching Chinese students pre-university”. It also referred to her position as Foundation (Honorary) Principal of the College and “providing advice and consultancy in establishing the College”.

2.76
In our view, this declaration was not adequate, as it did not specify that Cambridge Class Limited was providing educational services, including selling its curriculum materials, to the College. There is no record that the Board considered the declaration by Mrs Annan, and, therefore, it did not take the opportunity to discuss whether action was necessary to remove or mitigate the conflict of interest.

2.77
On 24 February 2003, the College was officially opened. Two Chinese pupils who were with the School in year 12 enrolled at the College for year 13. The School retained 7 Chinese students who moved from year 12 in 2002 to year 13 in 2003.

2.78
On 8 March 2003, Mrs Annan and others signed the contract for the provision of educational services between the College and Cambridge Class Limited.

2.79
The marketing brochure issued by the College in about March 2003 referred to –

…other subjects [that] can be studied by arrangement with our partner Cambridge High School [and] …our guarantee is that a student who is hard working and keen to learn will succeed in gaining university entrance in one year at our college.

2.80
The contact e-mail address in the brochure was Mr Annan’s at Cambridge High School.

2.81
As a result of enquiries by the School’s auditor, in May 2003, the Chairperson of the Board wrote to the Ministry saying that the proposal to contract with the College was still being worked on.

2.82
In addition, the Board applied to the Ministry for approval of the $5,000 for additional remuneration paid to Mrs Annan in 2002 for her work on the College’s application for a private school licence. On 31 July 2003, the Ministry approved the payment in retrospect.

2.83
On 14 and 15 June 2003, while on an overseas marketing trip, Mrs Annan engaged in e-mail correspondence with the College about its marketing activities, and the difficulty in achieving the minimum figure of 60 students for the 2004 school year. One of the e-mails said: “A successful one year programme, endorsed by Cambridge High School, would be very popular indeed.”

2.84
In July 2003, Mrs Annan reported to the Board on the overseas student programme. The report mentioned her interest in the College and said that, while at some stage in the future she and Mr Annan expected to receive remuneration from the College, to date no money had been paid from the College to either of them. The report did not mention Cambridge Class Limited, its relationship with the College, or that she and Mr Annan expected to receive income from Cambridge Class Limited because of its contract with the College.

2.85
On 17 November 2003, Mr Annan wrote to the Chairperson of the Board declaring his intention of undertaking a private business venture called Cambridge Class Limited, which was said to be involved with the supply of professional educational and curriculum materials and services.

2.86
The letter said that the venture would not interfere with Mr Annan’s duties with the School.

2.87
In our view, this declaration was not adequate because it did not mention that Cambridge Class Limited was providing educational services to the College. This notification was more than a year after Cambridge Class Limited was established. Mr Annan told us that he could not recall why he declared his interest at that time or why it took him more than a year to make the declaration.

2.88
In February 2004, 6 Chinese students who had been with the School in year 12 enrolled at the College for year 13. The School retained 2 Chinese students who moved to year 13 in 2004. We were not able to determine the reasons for the transfer of the 6 students. However, we note that the transfer of these students is evidence of competition between the School and the College.

2.89
The agent-owner confirmed to us that there was financial pressure to achieve the minimum of 60 students mentioned in the contract between the College and Cambridge Class Limited.

2.90
On 15 April 2004, Mrs Annan submitted a conflict of interest declaration to the Chairperson of the Board. It referred to Cambridge Class Limited as “ESOL5 and curriculum material” and the College as “international education”.

2.91
In our view, this declaration was not adequate because it did not mention that Cambridge Class Limited provided educational services to the College.

2.92
On 25 May 2004, the accountants of Cambridge Class Limited produced a paper on Directors’ Remuneration, which showed $15,000 payable to each of the Annans. It is understood that this was paid by means of a single cheque for $30,000 to Mr Annan. Mrs Annan declined to answer our questions about these payments because, in her view, it was a private company matter. Mr Annan said that the payments were in respect of general directors’ services.

2.93
On 21 June 2004, Mrs Annan reported to the Board that, for a variety of reasons, the partnership with the College had never proceeded beyond the proposal stage. She said that she had never been paid for the position of Principal of the College, and that neither she nor Mr Annan was on the College payroll. The report mentioned Cambridge Class Limited, but made no reference to its contract with the College.

2.94
On 26 July 2004, the College’s website still made reference to the facilities of the School being available to College students.

Information provided to Cambridge High School’s auditor

2.95
From May 2003 onwards, the School’s appointed auditor sought information on the College and Cambridge Class Limited in the context of the audit of the School’s 2002 financial statements. The initial responses given by the Board to the auditor included:

  • The Principal had not been involved in decisions where a possible conflict of interest existed.
  • Heads of agreement negotiations between the College and the School were still in progress. (This was 6 months after it had been decided that the School’s facilities would no longer be required.)
  • The College employed Mrs Annan as Principal.
  • Mrs Annan was still working on the proposal to go to the Ministry.

2.96
In August 2003, as a result of continuing enquiries from its auditor, the Board told the auditor that the proposed relationship with the College was not going to proceed and that Cambridge Class Limited had nothing to do with the School.

2.97
The Board was asked about a potential breach of Schedule 6 of the Act, which requires a trustee who has a financial interest in a matter to be excluded from any meeting of the Board while it discusses the matter.

2.98
The Board accepted that there had been a breach of the Act, in that Mrs Annan had been present while the Board discussed the College, in which she had a financial interest (see paragraphs 2.11-2.12). The Board said that the breach had occurred through genuine oversight, and agreed to disclose it in its financial statements for 2002.

2.99
Also in August 2003, the Board confirmed that it was not aware of, nor had it agreed to, any contract for services between the School and the College. As far as the Board was concerned, the College proposal was still on the table. The Board also said that it was unaware of the existence of Cambridge Class Limited, and believed that the company had nothing to do with the School’s affairs.

2.100
By September 2003, the College had formally decided that it would not enter into a contract with the School either for its services or in co-operation as a partnership. Both the Annans signed the College minute recording this decision.

2.101
On 24 March 2004, the appointed auditor’s report to the Board on the School’s 2002 audit was completed. In relation to the College, the report recommended that the Board take steps to ensure that third parties obtained consent before claiming any form of relationship. This was because the College had referred to a relationship with the School in gaining accreditation, although the Board had not considered the nature of the relationship other than in principle.

2.102
In relation to Cambridge Class Limited, the appointed auditor’s report gave all the information to the Board that had been obtained about the company in the interests of transparency and openness.


4: Under the Public Audit Act 2001, the Auditor-General is the auditor of state schools. He can appoint private sector audit firms (appointed auditors) to act on his behalf.

5: English for Speakers of Other Languages.

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