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Chapter 5
International regulatory environment—forms of prohibition
5.1
This chapter will examine some approaches taken by jurisdictions that
attempt to prohibit online gambling. As noted in the previous chapter,
regulation of online gambling is an area of change. Therefore some details
within this chapter may have changed by the time the report is published.
The prohibition model
5.2
Despite a growing number of countries adopting a managed regulatory
approach toward online gambling, many jurisdictions have adopted forms of prohibition
on interactive and online gambling, including the United States (US), Germany
and Canada. These approaches are outlined below.
United States of America
5.3
Despite online gambling being prohibited in the US, the US online
gambling market amounts to approximately US$92.27 billion per year in revenue[1] and has around seven
million online gamblers.[2]
Online gambling regulation in the US is a two tier system where online gambling
is regulated by a combination of state and federal legislation:
In the US, the States have powers to regulate gambling within
their own borders, with the Federal government able to regulate gambling
activity that occurs across State borders.[3]
5.4
While the federal government has sought to clarify legislation
prohibiting online gambling, some states and districts, including Nevada,
California and Washington D.C., have introduced legislation liberalising online
poker.[4]
Federal legislation
5.5
Online gambling in the US is prohibited under two pieces of federal
legislation; the Wire Act 1961 (Wire Act) and the Unlawful Internet
Gambling Enforcement Act 2006 (UIGEA). These work in conjunction with state
legislation to prohibit the provision of online gambling across state borders.
Wire Act 1961
5.6
The Wire Act prohibits a person from being engaged in or betting or
wagering on any sporting events or contests over wire communication facilities:
Whoever being engaged in the business of betting or wagering
knowingly uses a wire communication facility for the transmission in interstate
or foreign commerce of bets or wagers or information assisting in the placing
of bets or wagers in any sporting event or contest, or for the transmission of
a wire communication which entitles the recipient to receive money or credit as
a result of bets or wagers, or for information assisting in the placing of bets
or wagers, shall be fined under this title or imprisoned not more than two
years, or both.[5]
5.7
In 2002, the US Fifth Circuit Court of Appeals ruled that the Wire Act
only applied to sporting events and contests.[6]
Despite this ruling, the US Department of Justice has continued to interpret
the Wire Act to mean that all forms of gambling over the internet are illegal.[7]
Unlawful Internet Gambling
Enforcement Act 2006
5.8
The UIGEA works in combination with the Wire Act to impose financial
restrictions on online gambling providers and companies who attempt to offer
services to US consumers.
5.9
The UIGEA came into effect on 13 October 2006.[8]
The UIGEA 'makes it a felony for a person engaged in the business of betting or
wagering to knowingly accept money in connection with unlawful gambling'.[9]
It achieves this by prohibiting banks and credit card companies from processing
and settling payments for unlawful internet gambling sites.[10]
5.10
The UIGEA does not define unlawful online gambling. Rather it
establishes financial restrictions on transactions made for any form of
gambling defined as unlawful under state or federal law, working in combination
with the Wire Act and various state laws. Responsibility for interpreting the
legislation and determining which online gambling services are unlawful rests
with financial institutions, which may commit an offence if they process a
payment for a bet or wager in relation to an unlawful internet gambling
transaction.[11]
5.11
iBus Media stated that the US Treasury has estimated a compliance cost
of US$88.5 million in staff costs associated with the application of the UIGEA,
an amount iBus Media argued represents an 'excessive compliance burden' on
financial institutions.[12]
Effectiveness in preventing online
gambling
5.12
Despite the compliance cost associated with the introduction of the
UIGEA, the Australian Racing Board stated that there was an initial withdrawal
of some online gambling providers from the US market, which resulted in
significant drops in profits by gambling providers:
Evidence suggests that prior to the introduction of the
UIGEA, US patrons comprised a significant proportion of global interactive gambling
participation. An example in the literature is of the Gibraltar-based online
company PartyGaming PLC, which reported a reduction in daily revenues from $3.6
million to around $872,000 after it decided to terminate customer relationships
with US patrons.[13]
5.13
Professor Robert Williams and Associate Professor Robert Wood agreed
that the introduction of the UIGEA resulted in a 25 per cent decrease in the
number of online gambling sites accepting bets from US citizens. However, they
argued that this reduction has not been permanent with many US citizens
participating in online gambling and finding ways around the restrictions
imposed by the legislation:
The UIGEA is not directed at individual bettors, and there
have only been rare cases of prosecution of US citizens for placing an Internet
bet...Anecdotal information suggests that many US players are circumventing the
UIGEA by depositing money into non-US financial transaction intermediaries to
place bets...Furthermore, many online gambling sites ensure that credit card
and/or banking statements do not indicate that the transaction was for
gambling.[14]
5.14
iBus Media also reported that rather than transferring funds to gambling
operators through their financial institution, consumers are depositing funds
into electronic accounts or 'e-wallets' as a means of circumventing
restrictions imposed by the UIGEA:
Electronic accounts or e-wallets are online accounts which
draw on a consumer's bank account or credit or debit card and then route the
consumer's funds to the online operator, many of which are offshore and
therefore not regulated in the US. This model makes it difficult for US
financial institutions to distinguish between a gambling transaction and other
transactions.[15]
5.15
The committee was interested to hear more about the US experience with
online gambling financial controls and requested to speak with the relevant US
agency but unfortunately they declined to respond. The committee notes that the
government's review of the Interactive Gambling Act (IGA) will be looking into
'international regulatory approaches to online gambling services including
consideration of their effectiveness and cost'.[16]
Effectiveness of US legislation
5.16
The Australian Racing Board argued that while some online providers have
managed to avoid financial restrictions under the UIGEA, US legislation has
been relatively successful in reducing online gambling:
The financial transactions controls that are in place there
have been there for some years now and they are demonstrably effective...The
business of the companies that were providing illegal gambling to American
citizens dried up. There is some level of it—it is not being suggested that it
is going to be 100 per cent efficacious—but it dropped like a stone in the
US...The US has done it and is doing it, and it is working.[17]
5.17
iBus Media argued that as a result of US legislation, reputable
regulated companies have withdrawn from the US market, resulting in customers
accessing unregulated and potentially dangerous sites:
US-based consumers are still able to access offshore sites,
many of which are unregulated and many do not have harm minimisation measures
in place...
Critics have also noted that the UIGEA has resulted in
publicly-listed, transparent and heavily regulated United Kingdom-based online
gambling companies no longer accepting funds from US-based customers....[18]
5.18
The main criticism levelled at online gambling legislation in the US is
that there is a level of uncertainty surrounding the application of legislation
and what constitutes unlawful online gambling. Congress outlined this
uncertainty in Section 2 of the Internet Gambling Prohibition, Poker
Consumer Protection, and Strengthening UIGEA Act of 2011:
(2) The Unlawful Internet Gambling Enforcement Act of 2006 (title VIII of
Public Law 109-347; 120 Stat. 1952) was intended to aid enforcement efforts
against unlawful Internet operators and to limit unlawful Internet gaming
involving United States persons. However, that Act has only been partially
successful in doing so.
(3) There is uncertainty about the laws of the United States governing
Internet gambling and Internet poker, though not about laws governing Internet
sports betting. The Department of Justice has maintained that a broad range of
activity is illegal, including activity that Congress intended to legalize
under the Interstate Horseracing Act of 1978. Certain court decisions have used
logic not consistent with aspects of the position of the Department of Justice.
Enforcement efforts would be aided by bringing greater clarity to this area.[19]
5.19
However, despite this uncertainty, US authorities have undertaken legal
action against individuals and online gambling providers located outside the US
in an attempt to prevent circumvention of the UIGEA and the Wire Act which is
described below.
Current US enforcement action
5.20
The committee received evidence on the current legal proceedings
occurring in the US regarding alleged illegal gambling activities by a number
of online poker sites:
In April 2011, operators of three online poker sites became
the subject of a civil complaint filed by US authorities and certain
individuals associated with these sites were indicted for, among other matters,
accepting funds from US-based players. All charges are being strenuously
defended. The civil complaint and indictments do not relate to the UIGEA
directly and instead concern allegations of conspiracy to commit bank and wire
fraud and money laundering activities.[20]
5.21
The Australian Racing Board noted that the legal action represents a
recent development in the application of the UIGEA:
A notable recent development here has been the FBI's use of
information supplied by Australian internet entrepreneur, Daniel Tzvetkoff, to
lay charges of bank fraud, money laundering and illegal gambling against the
founders of the 3 largest US online poker companies. A scheme to deceive banks
about the true nature of transaction[s] with them, and so evade the financial
transactions controls of the UIGEA, is at the heart of these prosecutions...[21]
5.22
iBus Media argued that the charges do not directly relate to the UIGEA:
The civil complaint and indictments do not relate to the
UIGEA directly and instead concern allegations of conspiracy to commit bank and
wire fraud and money laundering activities.[22]
5.23
US Attorney, Mr Preet Bharara, outlined the case in a recent media
release the day after 'Black Friday'[23]:
As charged, these defendants concocted an elaborate criminal
fraud scheme, alternatively tricking some US Banks and effectively bribing
others to assure the continued flow of billions in illegal gambling profits.
Moreover, we allege, in their zeal to circumvent the gambling laws, the
defendants also engaged in massive money laundering and bank fraud.[24]
Committee view
5.24
The committee notes that while enforcement of online gambling
prohibition in the online environment is difficult and uncertainty surrounds
the application of some pieces of US legislation, the current legal action in
the US demonstrates that enforcement action is possible.
Other enforcement challenges
5.25
Despite recent enforcement action referred to above, the US has
experienced difficulties applying legislation to operators located outside the
US. Such attempts by US authorities resulted in action being taken by the World
Trade Organization (WTO).
Antigua V United States online
gambling dispute
5.26
In 2003, Antigua initiated the WTO dispute resolution process
challenging the US prohibition of offshore online gambling.[25]
Antigua argued that prohibition breached the commitment made by the US to free
trade in online gambling services in the General Agreement on Trade in Services
(GATS).[26]
In 2004, the dispute resolution panel ruled in favour of Antigua, and following
an unsuccessful appeal by the US in 2005, the WTO Arbitrator set April 2006 as
the deadline by which US legislation should be amended to comply with the
commitments under the GATS.[27]
5.27
Rather than changing its legislation, the US decided to modify its
commitments in the GATS under Article XXI, specifically removing online
gambling:
The US, instead of bringing its laws in line with the WTO
rules, announced in May 2007 that it would withdraw gambling from the services
it opened up under a 1994 world trade deal. Under WTO rules it then had to
offer comparable access in other sectors to interested countries.[28]
5.28
In response to this, in 2007 Antigua requested from the WTO the ability
to suspend $3.2 billion worth of US intellectual property rights which it
argued amounted to 'the value of Antigua-US online gambling services trade that
would have taken place had the US complied with the initial WTO ruling'.[29]
The WTO authorised the suspension of $21 million worth of US intellectual
property rights annually, which may include copyrights, patents and trademarks.[30]
A New York Times article explained the effects of the ruling:
...the ruling is significant in that it grants a rare form of
compensation: the right of one country, in this case, Antigua, to violate
intellectual property laws of another - the United States - by allowing them to
distribute copies of American music, movie and software products, among other
items.[31]
5.29
At the time of publication of Isaac Whol's article, domestic legislation
needed to allow this to occur had not been introduced.[32]
Future regulation for the US?
5.30
While online gambling is currently prohibited, there has been a move at
both the state and federal level towards a liberalised, regulated approach to
online poker.[33]
5.31
On 24 June 2011, the Internet Gambling Prohibition, Poker Consumer
Protection, and Strengthening UIGEA Act of 2011 (the bill) was introduced
into the House of Representatives by Texas Republican Joe Barton. The bill was
co-sponsored by both Democrat and Republican representatives, suggesting
bi-partisan support for the reforms.
5.32
The bill would legalise online poker across the US, allowing states who
wish to prohibit online poker to opt out. The following arguments for the bill's
passage were outlined:
(5) Poker is distinct from the class of games of chance traditionally
defined as gambling in that, players compete against each other, and not the
person or entity hosting the game (sometimes called `the house'), and that over
any significant interval, the outcome of a poker game is predominantly
determined by the skill of the participants.
(6) United States consumers would benefit from a program of Internet poker
regulation which recognizes the interstate nature of the Internet, but
nevertheless preserves the prerogatives of States. Such a system would require
strict licensing of Internet poker providers and would require licensee
operators to:
(A) have effective means to prevent
minors from playing poker on-line;
(B) identify and help treat
problem gamblers; to ensure that games are fair;
(C) allow players to
self-exclude and limit losses; and
(D) prevent money laundering.
(7) Such a program would create a new industry within the United States
creating thousands of jobs and substantial tax revenue for Federal and State
governments.[34]
Provisions of the bill
5.33
The bill provides for the establishment of state agencies responsible
for licensing online poker providers based in the US. The bill would require
license holders to meet strict standards for advertising and prevent services
being offered to individuals physically located in states which have opted out.
5.34
Licence holders would also be required to provide harm minimisation
measures to consumers including:
- information in plain language about responsible gambling and self
exclusion options;
- individualised responsible gaming options including the ability
to self-limit access to credit and direct marketing; and
- providers to ensure to a 'reasonable degree of certainty' that
self-excluded consumers are prevented from making bets or wagers during a
period of self-exclusion.[35]
5.35
The bill was referred to the Subcommittee on Crime, Terrorism and
Homeland Security on 25 August 2011.[36]
5.36
Other gambling related legislation introduced into Congress includes the
proposed Internet Gambling Regulation, Consumer Protection and Enforcement Act
(HR 1174) which would establish administrative and licensing requirements for
Internet betting, including background check requirements and suitability
standards for licence applicants.[37]
HR 1174 was referred to the Subcommittee on Crime, Terrorism and Homeland
Security on 1 June 2011.
Germany
5.37
Online gambling regulation in Germany is currently changing, with the
current Interstate Gambling Treaty due to expire on 31 December 2011.[38]
5.38
Online gambling is currently prohibited in Germany under the Staatsvertrag
zum Glucksspielwesen (Interstate Gambling Treaty), which came into force on
1 January 2008. The Treaty applies a blanket ban on all forms of online
gambling, regardless of whether an operator is 'foreign, domestic, state-run or
private'.F[39]F Section 4.4 of the
Treaty states:
The organising and arranging of public games of chance on the
Internet is prohibited.[40]
5.39
Advertising of online gambling via internet, television or
telecommunications is also prohibited by the Treaty.
5.40
The Treaty was effective across all 16 German states, resulting in
uniform legislation across the country, and establishes a maximum penalty of
five years imprisonment.[41] All states can order
service providers to block websites that offer illegal gambling and require
banks to prevent money transfers to these operators.
5.41
The aims of the Treaty are:
(1) To prevent the development of addiction to games of chance and gambling
and to establish the preconditions for combating this addiction in an effective
manner,
(2) To restrict the games of chance on offer and to steer the natural gaming
urges of the population along well-ordered and supervised paths, in particular,
to prevent a switch to illegal games of chance,
(3) To guarantee protection for young people and gamblers,
(4) To ensure that games of chance are conducted in accordance with
regulations, that gamblers are protected against fraudulent wheelings and
dealings, and that the criminal aspect which follows and accompanies games of
chance is averted.[42]
5.42
The Treaty, which applies a blanket ban on all online gambling, has been
criticised for being excessively restrictive and failing to prevent players
from participating in online gambling:
In implementing a blanket ban, it is arguable that the States
have gone further than what is necessary in order to achieve the stated
objective; namely, to protect the players.[43]
5.43
Regis Controls pointed to the large level of online gambling
participation in Germany which has 'the second highest number of regular online
gamblers in Europe' as a failure of the German prohibition model.[44]
Review of legislation
5.44
In addition to concerns over the restrictive nature of the Treaty and
the apparent failure to prevent German citizens participating in online
gambling, the Court of Justice of the European Union (EU) ruled on 8 September
2010 that the Treaty breaches EU competition law.[45]
In response, a new draft Interstate Gambling Treaty has been developed jointly
by 15 of the 16 federal German states.[46]
A second piece of legislation, the draft Gambling Bill, has been
developed independently by the remaining federal German state of
Schleswig-Holstein and was passed through the state's parliament on 14
September 2011.[47]
Joint draft Interstate Gambling
Treaty
5.45
15 of the 16 federal German States developed a new draft Interstate
Gambling Treaty (IGT) following the European Union Commission ruling in
September 2010 that the current Treaty breaches EU competition law. The new IGT
proposes opening up the German sports betting market and limiting the number of
federal licences for private operators of sports betting to seven.[48]
The draft would also implement a '16.67% tax on all stakes',[49]
which some have argued is overly restrictive.[50]
5.46
The draft IGT would implement limits on live-betting options and a limit
on online sports stakes.[51]
It would also require operators wishing to offer casino-style online games to
gain a 'bricks-and-mortar' physical casino licence:
In regard to online casino games, the Prime Minister further
announced that a German licence for a bricks-and-mortar casino will be required
and that such games will only be permissible 'as offered in the gambling hall
of a state-licensed casino'. This means that real gambling in the gambling hall
of bricks-and-mortar casino has to be transmitted to the player, for example,
by filming a roulette wheel.[52]
5.47
On 18 July 2011, the European Union Commission released a detailed
Opinion rejecting the draft IGT and requested further reasoning and
justification behind some measures. The draft IGT is expected to be amended in line
with the European Commission's Opinion.[53]
Draft Gambling Bill from
Schleswig-Holstein
5.48
On 9 May 2011, the European Union Commission approved the draft Gambling
Bill developed by the state of Schleswig-Holstein which proposes to liberalise
online gambling in Germany.[54]
On 14 September 2011, the Schleswig-Holstein parliament passed the bill by a
vote of 46 to 45.[55]
5.49
The new online gambling law will allow companies to offer 'exchange and
sports betting, as well as poker and casino games'[56]
excluding blackjack, baccarat and roulette, provided they are established in
the EU.[57]
Companies may apply for an unlimited number of licences which will be valid
from March 2012.[58]
5.50
A key component of the legislation which differs from the other German
states' draft is the establishment of a 20 per cent tax on gross profits:
Companies will pay a 20 per cent tax on gross profits, rather
than the 16.67 per cent tax on individual stakes proposed elsewhere, a levy
which betting companies have argued would make it impossible for them to
compete against state-run operators.[59]
5.51
The legislation was well-received by some in the industry and resulted
in increases in the share prices of some major industry players:[60]
The resolution passed today is an important and
groundbreaking step on the way to an open and regulated gambling market in
Germany.[61]
5.52
The legislation is expected to come into force on 1 January 2012.[62]
Canada
5.53
Regulation of interactive gambling in Canada occurs through a mix of
federal and provincial legislation. While federal legislation prohibits the
provision of online gambling under the Criminal Code of Canada, provinces have
the power to regulate interactive gambling within their province.[63]
Canadian federal law has been interpreted by provincial
governments as allowing them to legally operate an Internet gambling website as
long as patronage is restricted to residents within that province.[64]
5.54
While federal law 'may prohibit Canadians from participating in gambling
on a website located in another country, there is no mechanism to effectively
enforce the prohibition'.[65]
The Ontario Lottery and Gaming Corporation highlighted the services available
despite prohibition:
Under section 207.1(a) of the Criminal Code of Canada, only a
Province or its designated agency may legally conduct any gambling activities
that involve electronic devices. Internet gaming operators are unable to
conduct operations in Canada, or to advertise their "play-for-money"
sites. However, they continue to advertise "play-for-free" sites
extensively, and Canadians spend an estimated $1 billion annually at a range of
unregulated gaming sites.[66]
Provincial online gambling
regulation
5.55
Currently, online gambling is legal in British Columbia and the Atlantic
provinces and some 'First Nations'[67]
including the Quebec-based Kahnawake Mohawk First Nation, which has established
the Kahnawake Gaming Commission (KGC) to 'license and regulate some 30 gambling
websites operated through Internet servers physically located on their tribal
lands'.[68]
5.56
The Ontario Lottery and Gaming Corporation recently announced its
intention to offer internet gaming, which will be regulated by the Alcohol and
Gaming Commission of Ontario.[69]
Dr Sally Gainsbury and Professor Alex Blaszczynski discussed the internet
gambling platform proposed for launch in 2012:
The site will not be launched until extensive consultation
with stakeholders has been completed and a strict responsible gambling platform
will be introduced based on empirical evidence and consultation with
stakeholders. This includes mandatory pre-commitment limits for time and money,
pop-up messages to communicate with players and responsible gambling tools such
as self-help tests and information about games.[70]
An international regulatory standard?
5.57
During the inquiry, many submitters raised the idea of a cohesive
international approach toward online gambling regulations. In the 2007 report prepared
for Department of Families, Housing, Community Services and Indigenous Affairs
(FaHCSIA), the Allen Consulting Group stated that international regulatory
frameworks were important to the application of Australian legislation for two
reasons:
- The effectiveness of these models directly impacts on the
accessibility of interactive gambling services for Australians.
- The models provide useful examples for Australian regulators to
consider as potential inclusions to the Australian regulatory model (or,
conversely, provide cautionary tales of approaches which are not effective).[71]
5.58
In its 2010 report, the Productivity Commission (PC) supported
international collaboration on online gambling regulation, stating that 'where
possible, regulation should be aligned with that of similarly liberalised
countries'.[72]
5.59
Dr Gainsbury and Professor Blaszczynski supported the position of the PC
in their evidence to the committee:
This is an extremely sensible approach as it would allow
policy measures such as filters and blocking software to be shared and Internet
sites to be regulated and evaluated based on international guidelines...[73]
5.60
The Gaming Technologies Association (GTA) attributed the need for
transnational regulation to the global nature of online gambling and argued
that transnational cooperation is necessary to effectively regulate online
gambling:
Internet gambling is unimpeded by physical borders. The
increasing incidence of mobile devices which are routinely connected to the
Internet has resulted in an uncontrolled proliferation of gambling
opportunities available in Australia with no restriction, despite attempted
local prohibition...
...Online gambling is here to stay and defies local
prohibition. Its appropriate operation through legislation and regulation requires
transnational thinking and international cooperation.[74]
5.61
The interest in international cooperation is evident in many
jurisdictions, particularly in Europe where, in March 2011, the European
Commission published a Green Paper on online gambling:
...to launch an extensive public consultation on all relevant
public policy challenges and possible Internal Market issues resulting from the
rapid development of both illicit and unauthorised on-line gambling offers
directed at citizens located in the EU.[75]
5.62
GTA stated that the Green Paper would act as a 'precursor to a White
Paper and quite likely, draft online gambling legislation in the form of a
directive'.[76]
5.63
The Green Paper addresses the issue of different national regulatory
frameworks in an international gambling environment:
Enforcement of national rules is facing many challenges,
raising the issue of a possible need for enhanced administrative co-operation
between competent national authorities, or for other types of action.[77]
5.64
While acknowledging that working towards international agreements with
similar jurisdictions would be beneficial, Dr Gainsbury and Professor
Blaszczynski noted that the global nature of online gambling makes the creation
of an international online gambling policy problematic as 'policy must reflect
the needs of a local population'.[78]
5.65
While recognising the difficulties in creating an international standard
that jurisdictions will sign up to, the PC noted that international cooperation
may provide consumers with stronger protections:
It is likely that multilateral government and commercial
action could secure a much better set of consumer protection standards for each
country. Like all commercial activities, some countries/providers may not wish
to adopt the global standards, but that very fact could be expected to make
consumers cautious of using their facilities, given the risks of fraud and poor
service.[79]
Committee view
5.66
The committee heard that international approaches to regulation could
serve as examples for Australian policy makers. Dr Gainsbury and Professor Blaszczynski
argued that there is no 'gold standard' style of regulation currently in
existence due in part to the global nature of internet gambling and the local
nature of internet gambling policy. Despite this, they argued that
international policies present a variety of ideas which can serve as a guide
for the creation of a unique internet gambling policy in Australia:
Nevertheless,
internationally jurisdictions are increasingly enacting more sophisticated
regulatory approaches in acknowledgment of the reality and permanence of
Internet gambling. Although Australian policy makers must formulate a unique
response to Internet gambling, international legislation can be used to guide
policies.[80]
5.67
The committee notes that the government review of the Interactive
Gambling Act 2001 will examine international regulatory approaches:
...and their potential applicability in the Australian
context and also the extent to which there are options to improve or look at
harm minimisation measures with respect to online gambling services.[81]
Conclusion
5.68
The committee supports the further examination of international
regulatory approaches and potential application to the Australian environment. It
also supports investigation of international collaboration on online gambling
regulation. However, the committee considers the process of establishing
transnational agreements or legislation will require extensive coordination and
consultation. It will be a lengthy process and is useful only as a long term
goal, not a short term policy. An additional danger is that in order to achieve
international agreement, the regulatory standards may be so low as to be of
limited usefulness.
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