WEALTH PURIFICATION PROCESS AS PART OF WEALTH PLANNING IN ISLAM By Professor Datuk Dr. Syed Othman Alhabshi INCEIF
[email protected] 1. INTRODUCTION The fact that all wealth belongs to Allah the Almighty, and man holds them only in trust, it is therefore incumbent upon man to adhere to the dictates of the Real Owner so that man can be counted as among those of God-conscious. One of the most significant and yet difficult task to perform is to part with something that man truly loves and covet. The Quran specifies that man’s pride is always associated with wealth and children. “Wealth and sons are allurements of the life of this world…” 1 In order to undertake such a task it requires a strong sense of sacrifice and faith. The call to sacrifice a portion of one’s wealth to be shared by the poor and needy was not made only when the Muslims were wealthy and affluent. It was made as early as the first year of Islam itself when majority of the Muslim converts were poor and needy. It was indeed a sort of early training for them to share whatever they have with others who may be more in need. Such training was so effective that in one of the battles, some years later, where the Muslim soldiers were badly injured someone went round to give them some water. When he approached the first man who was crying in agony, he was told to give the little amount of water to the next man because he sounded more in need than him. The second soldier when approached by the person bringing some water refused to drink it but told the man to bring it to a third person who sounded more in need than him. When he reached the third one, he was again told that the first one he approached was more in need of water than him. By the time he reached the first one, he was dead. He went on to feed the second one, but it was too late too. He has died. So he went to the third one and found that even the third man was also dead. When we reflect the wisdom of Allah’s calling man to share the little that they have especially with those in need, we cannot help but realize that in any known civilization in human history, there was always a small proportion of the people who own a much higher than proportionate amount of wealth, leaving a large number with very limited amount of wealth or resources to share among them. So much so, there is no known religion that does not enjoin their believers to part with some of their wealth to alleviate the sufferings of the poor. The benefit of sharing one’s wealth is not only enjoyed by the receiver but more so by the giver. The following statement of Allah in the Holy Quran testifies to this. “So fear God as much as ye can; listen and obey; and spend in charity for the benefit of your own 1
Surah Al-Kahfi (18) verse 46
souls…”2 It is clear from this verse that charity is meant not only to help and do good to other people who need it, but more importantly it has the highest subjective value for the person who gives it. The feeling of satisfaction that we have done something that makes someone else happy; we have alleviated the sufferings of some other people; we have indeed fulfilled our responsibility to show our caring attitude to others; etc. Like mercy “it blesses him that gives and him that takes”. More importantly, it helps to purify the giver’s soul: the affection that he pours out is for his own spiritual benefit and progress. Such an act would have much more meaning when we always remember that the wealth that we have generated and accumulated is not ours until we spend it. It becomes meaningful when we spend it in the way that is blessed by the Creator and Real Owner of the wealth. Islamic wealth planning therefore cannot be complete without purifying it. Purification of wealth can be done in two ways: namely through charity which is voluntary and through zakat which is compulsory. The voluntary charity can be done in two ways, namely through spending on others and secondly through the establishment of an endowment or waqf. 2. CONCEPT OF WEALTH PURIFICATION Wealth purification is the process of sacrificing something that one adores and loves very much for the benefit of others. The thing that we sacrifice, which is mainly our wealth, is not that wealth that has been illegitimately earned or acquired. It is the wealth that we have legally earned in accordance with the Shariah. The means by which we earn the wealth is legitimate and Shariah compliant as far as we know it. However, we are actually using the wealth that we have legally earned or acquired and is rightfully in our control to be given to the benefit of others so that we can be counted as righteous. In other words, we use the wealth to increase our remembrance of Allah who has endowed us with it. Wealth purification is not the same as wealth cleansing. Wealth cleansing is normally done when in the process of earning our wealth we had to do something that is in contravention of the Shariah. For instance, we may have to park our extra liquidity in interest bearing bank deposits because there is no other choice at that instance. However, the amount of interest income that we receive as a proportion of our total income is less than five (5) percent and hence that interest income is considered permissible by the Shariah Advisory Council of the Securities Commission of Malaysia. In another instance, we may have invested in Shariah-compliant securities which have, for some reason, changed status to Shariah non-compliant securities. We could not dispose them on the day it was announced that it has changed its status. We only managed to sell it a little later at a profit. Hence the profit that we make from the day it was announced until the day we sold it has to be cleansed, as per the advice given by the Shariah Advisory Council of the Securities Commission of Malaysia. 2
Surah At-Taghabun (64) verse16
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In the first case above, we need not cleanse it at all as long as the total interest income earned is less than five (5) percent of the total income. But in the second case we have to cleanse our wealth. Cleansing therefore is to give out as charity that part of our income that has been earned in ways that are Shariah non-compliant. Whereas, wealth purification is to use the wealth hat has been legitimately earned, in order to purify our soul by giving it away to charity. 3. VOLUNTARY SPENDING During the early period of Islam, when the newly converted Muslims were still very poor, Allah the Almighty has repeatedly encouraged them to spend from whatever Allah has endowed them with. The term “infaq” which means spending has been very frequently repeated in the Holy Quran. For example, Allah says in the Holy Quran, • “… and spend out of what We have provided for them”3 • “By no means shall ye attain righteousness unless ye give (freely) of that which ye love; and whatever ye give, of a truth God knoweth it well.”4 • “… to spend out of your love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask and for the ransom of slaves…”5 • “And spend something (in charity) out of the substance which We have bestowed on you, before death should come to any of you, and he should say, ‘O my Lord! Why didst Thou not give me respite for a little while? I should then have given (largely) in charity, and I should be one of the doers of good.’”6 • “O ye who believe! Give of the good things which ye have (honourably) earned, and of the fruits of the earth which we have produced for you, and do not even aim at getting anything which is bad, in order that out of it ye may give away something, when ye yourselves would not receive it except with closed eyes. And know that God is free of al wants and Worthy of all praise.”7 • “The parable of those who spend their substance in the way of God is that of a grain of corn: it growth seven ears and each ear has a hundred grains. God giveth manifold increase to whom He pleaseth: and God careth for all and knoweth all things.”8 These verses and many more serve to show the following: • •
Whatever sustenance or wealth that we have earned or created respectively belong to God and we have been strongly encouraged to share it with others If we do not give away freely or voluntarily a portion of the sustenance that we have earned or the wealth that we have created, do not hope to attain righteousness in the eyes of God. When we give away something freely it means
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Surah Al-Baqarah (2) verse 3 Surah Ali Imran (3) verse 92 5 Surah Al-Baqarah (2) verse 69 6 Surah Al-Munafiqoon (58) verse 10 7 Surah Al-Baqarah (2) verse267 8 Surah Al-Baqarah (2) verse 261 4
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•
• • •
we have no intention or hope of getting something in return. We leave it completely to God to reward us. Spending out of what has been endowed to us should start with ourselves, our relatives, the orphans, the needy, travelers in difficulty and for freeing the slaves in that order. In other words we should spend on those nearest to us first and then to others further and further away from us. Charitable acts that are done sincerely will bring much benefit to us in the hereafter. However, they should be done before we part from this world. When giving charity, make sure it is from your legal earnings and do not aim at attaining anything in return. Do not give away what you yourselves would not like to receive. The best is to give away what you love most. God has promised a multitude of reward for those who give away in charity. Yet we always tend to forget.
Here are some of the hadith or sayings of the Holy Prophet (peace and blessings be upon him) regarding spending • • • • • •
“If you spend (to help others) O son of Adam! (God) shall spend on you.” (Bukhari and Muslim) “Allah, the Most Blessed and High, said: O son of Adam! Spend, I will spend on you. The right hand of Allah is full and overflowing and nothing would diminish it by over-spending day and night” (Muslim) “Sadaqah given to a poor man is just sadaqah, but when given to a relative it serves a double purpose, being both sadaqah and a connecting link.” (Ahmad, Tirmidhi, Nasai, Ibn Majah, Darimi) “Of the dinar which you spend to set a free a slave, or as a sadaqah given to the needy or which you spend on you family, the one which you spend on your family, yields the greatest reward” (Muslim) “It is better for a man to give a dirham as sadaqah (charity) during his lifetime than to give a hundred at the time of his death” (Abu Dawud) “Do not consider any act of kindness insignificant, even meeting your brother with a cheerful face” (Muslim)
From the above ahadith (plural of hadith) it is clear that not only spending for charity on others is an important good deed but will be well recompensed by Allah. It is also interesting to note that spending or feeding one’s own family is itself charity. However, charity should be given during one’s lifetime because there is no more charity after death. Charity is not only confined to the sharing of one’s wealth alone, but giving a piece of good advice, or sharing someone’s sorrows or even showing a cheerful face to someone is also considered as charity. 4. ESTABLISHMENT OF WAQF OR ENDOWMENT Whilst charity is normally a one off gift with less lasting benefit, a waqf is an endowment that has long term perpetual benefit. When verse 92 of Surah Ali-Imran (3) which means,
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“By no means shall ye attain righteousness unless ye give (freely) of that which ye love; and whatever ye give, of a truth God knoweth it well” was revealed, it was reported that almost everyone in the Muslim community then gave away in charity whatever they own that is worthwhile to be given away. Properties including land, orchards, wells, even utensils were given away as waqf for the perpetual benefit of others. Sayyidina Umar Ibn Khattab, (may Allah be pleased with him) one of the exemplary companions of the Holy Prophet (peace and blessings of Allah be upon him) who later became the Second Caliph of Islam, went up to the Holy Prophet (peace and blessings of Allah be upon him) and said, "O Allah's Apostle, I got some land in Khaibar which is better than any that I had before, what do you advise me to do with it so that I can be closer to Allah?” The Holy Prophet said, "If you like you can give the land as endowment and give its fruits in charity." So Umar gave it in charity as an endowment on condition that it would not be sold nor given to anybody as a present and not to be inherited, but its yield would be given in charity to the poor people, to the Kith and kin, for freeing slaves, for Allah's Cause, to the travelers and guests; and that there would be no harm if the guardian of the endowment ate from it according to his need with good intention, and fed others without storing it for the future." This special advice by the Holy Prophet (peace and blessings of Allah be upon him) is indeed the perfect definition of waqf or endowment that has been practiced over the centuries. Umar’s descendents till this day still benefit from the waqf that he gave away in his lifetime.9 The Muslim contributions to waqf have been very significant especially at the height of Islamic civilization and empire. The University of Al-Azhar, the first university in the world was established and operates till this day solely on waqf fund. Students are given free education till today and foreign students from all over the world are given scholarships to cover their living cost. Al-Azhar university system starts from secondary schools which are distributed almost all over Egypt. Al-Azhar also used to send professors to the Muslim world to help in the development of Islamic education at their own cost. The perpetual benefit of waqf as an institution is clearly demonstrated by the Al-Azhar education or university system. The benefit has been enjoyed by Muslims globally for more than 1000 years and judging from its track record, such benefits will continue indefinitely. Waqf institution has played a very significant role in other countries, particularly in Turkey which has been widely practiced by Muslims from the advent of the Uthmaniyyah Empire. It has contributed much towards the socio-economic development of Turkey and it still is playing a major role to this day.
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The late Professor Dr. Ismail al-Faruqi once told me that he was one of Umar’s descendents and when he was alive he benefited from the waqf that was made by Sayyidina Umar ibn Khattab who was also known as al-Faruq.
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Indeed almost all Muslim countries have established the waqf institution in some form or other which has been instrumental especially in the development of Islamic education. By providing such endowments for education, the benefits will not only be directly enjoyed by the recipients of the fund, but more importantly with the knowledge that the recipients have acquired will certainly benefit him and his family in the future. The effects will multiply manifold indeed. This is why waqf is the best form of wealth purification which has been directly taught by the Holy Prophet (peace and blessings of Allah be upon him) himself. The person who bequeathed his wealth in the form of waqf will certainly enjoy the blessings of Allah as long as the waqf produces benefits to the beneficiaries. 5. ZAKAH OR COMPULSORY DUES It is very interesting to note that while Islam was first introduced to this earth by the Holy Prophet Muhammad (peace and blessings of Allah be upon him) in Makkah around 609 AD, it was not until the migration of the Holy Prophet (peace and blessings of Allah be upon him) and the Muslims to Madinah in 619 AD that the Zakah or Zakat has been enforced. We should also take note that God the Almighty in His infinite wisdom has strongly encouraged the early Muslims to spend out of whatever they have in charity right from the beginning. This was reinforced by the practice and sayings of the Holy Prophet (peace and blessings of Allah be upon him) himself throughout the Makkah period. After a decade of educating and training the Muslims to be generous to his family, neighbours, the poor and needy, it was not a difficulty for the Muslims to abide by the injunction to pay the zakat dues when it was made compulsory. However, it should be noted that immediately after the demise of the Holy Prophet (peace and blessings of Allah be upon him) in 632 AD, certain Muslim communities refused to pay the zakat, despite all the previous training and educating during the Makkah period and the 13 years of paying zakat during the time of the Holy Prophet (peace and blessings of Allah be upon him) in Madinah. This issue gave rise to differences of opinion between the newly appointed Caliph, Abu Bakr As Siddiq and the most influential of Muslims at the time, Umar ibn Khattab (may Allah be pleased with them). The Caliph was adamant that he will wage war against those who refuse to pay zakat, whereas Umar ibn Khattab did not agree with such severe punishment. Although Umar did not follow the Caliph to fight against those who refuse to pay zakat, eventually he agreed with the Caliph. The Caliph was of the opinion that the daily prayers and zakat could not be separated. While the daily prayers pertain to spiritual upliftment, zakat is a responsibility on one’s wealth. 5.1
Types of Zakat
Zakat can be classified into two main categories as follows: •
The first one is on the individual self which is called Zakat al-Fitr.
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•
The second one is on the wealth.
Zakat al-Fitr is obligatory on every individual Muslim except the poor and the needy. Ibn `Umar said: "The Holy Prophet (peace and blessings of Allah be upon him) enjoined the payment of one Sa'a of dates or one Sa'a of barley as Zakat al-Fitr on every Muslim, young and old, male and female, free and slave." (Related by al-Bukhari and Muslim) This includes every Muslim alive from the evening of the Eid al-Fitr until the Eid prayer the next morning. In other words if a child is born at any time during that period or someone died at any time during that period will be obligatory to pay the Zakat al-Fitr. It excludes a child born after the Eid prayer or someone died before the evening of the Eid. As the above hadith indicated, the amount of Zakat al-Fitr is one Sa'a of dates or barley. Sa'a is a volume measure corresponding approximately to the volume of 5 lb of good wheat. The material of the Zakat can be dates, barley, wheat, rice, corn or similar items considered as basic foods. Abu Saeed said: "We used to give for Zakat al-Fitr on behalf of every child, aged person, free man or slave during the lifetime of the Messenger of Allah (peace and blessing of Allah be upon him) one Sa'a of food, or one Sa'a of dried yogurt, or one Sa'a of barley, or one Sa'a of dates, or one Sa'a of raisins." (al-Bukhari and Muslim.) As is practiced today in most Muslim countries, the amount is equivalent to the money value of a full meal. Zakat al-Fitr has to be paid by the end of Ramadhan. There are two times to pay Zakat al-Fitr: either one or two days before Eid as 'Umar used to do, or the day of Eid before the Eid prayer. Ibn `Umar reported that the Prophet (peace and blessing of Allah be upon him) ordered them to pay Zakat al-Fitr before they go out to perform the Eid prayer. If Zakat al-Fitr is paid after the Eid prayer, it will only be considered as regular charity. The Prophet (peace and blessing of Allah be upon him) said: "If one pays Zakat al-Fitr before the Salat (the Eid Prayer) it is considered an accepted Zakat, if he pays it after the Salat, it is considered an ordinary charity." (Abu Dawud.) The purpose of Zakat al-Fitr is to purify the one who has fasted from any type of indecent act or speech he might have committed while fasting. It also helps the poor and the needy. Ibn Abbas said: "The Messenger of Allah (peace and blessings of Allah be upon him) enjoined Zakat al-Fitr on the one who fasts to shield him from any indecent act or speech and for the purpose of providing food for the needy." (Abu Dawud and Ibn Majah.) Zakat al-Fitr is to be given to the same eight categories or people as in the other types of Zakat. Some scholars say that the poor and the needy are the most deserving ones since the Prophet (peace and blessings of Allah be upon him) said as in the above hadith that it had "...the purpose of providing food for the needy." 5.2
Zakat on Wealth
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There are basically five types of Zakat on wealth as follows: 5.2.1 5.2.2 5.2.3 5.2.4 5.2.5
Zakat on business or trade; Zakat on cash (gold, silver or money equivalents, including savings); Zakat on agricultural produce; Zakat on mining; and Zakat on domestic animals (which are limited to camels, cows, buffaloes, goats, sheep)
It is interesting to note that these are the five basic items where zakat is due. They form the basis for the zakat framework. Although there are only five basic types of zakat on wealth but they actually encompass all forms of wealth as will be explained later. Before we go to the zakat framework we have to know the nature and requirements of each zakat type. Zakat is due only when the following two conditions are fulfilled: •
•
when we have the complete ownership of the wealth which implies that we are able to use it whenever we need. According to this basic principle if the wealth belongs to us but we are not able to use it because of the requirements of the state, such as the Employees Provident Fund, then we need not pay the zakat. Similarly, some school of Jurisprudence opined that we need not pay zakat on money lent to others who are unable to pay on time. zakat should not be paid out of income earned through Shariah non-compliant means or sources.
Two other principles generally apply to all forms of zakat on wealth except zakat on agricultural produce. They are the nisab or the minimum amount of wealth that must be available before one is liable for zakat. The nisab is often calculated on the basis of the minimum amount of wealth required to cover the basic needs. Secondly is the howl or period which is one Hijriah and not the Gregorian year. However, for agricultural produce, there is no requirement for howl. 5.2.1 Zakat on Business or Commerce Zakat on business includes all forms of business that brings profits to the owner. However, zakat should only be paid out of businesses that are Shariah compliant. This implies that such businesses should not be conducted by an under-aged child except with the expressed permission of his guardian, or by a slave except with the permission of his master, or by a blind man except accompanied by a representative or by an insane person. The product or service that is traded must be halal, useful and deliverable and should be concluded at a mutually agreed price with an offer and acceptance. The offer and acceptance could be in writing or verbal, depending on the size of the transaction or risk involved.
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The rate of zakat on wealth from business is 2.5 percent per annum calculated on the net worth of business that has been conducted for a year. In other words, it is 2.5 percent of the difference between current asset and current liability less cost of doing business. The calculation is not the same as that of corporate tax which is 26 percent (2007 rate) the net profits. 5.2.2 Zakat on Cash and Savings Cash means cash money or equivalents. The equivalents include gold and silver since both these metals have been used as money or medium of exchange. Other forms of cash and should be included in the calculation is the savings that has fulfilled the howl or one year period. If the total amount of cash exceeds the nisab and has also fulfilled the howl, then the zakat payable is only 2.5 percent. 5.2.3 Zakat on Agricultural produce For agricultural produce there is no howl but the quantity should fulfill the nisab. However, there are two different rates for agriculture. If the farming requires irrigation, then the rate of zakat is 5.0 percent. However, if the farming does not requite irrigation then the zakat rate is 10 percent of the total produce. This means that the rice farmers who harvest three times a year will have to pay zakat three times or on every harvest. 5.2.4 Zakat on Mining There is also no howl requirement for mining. The zakat is 20 percent of the proceeds from mining less cost of mining the resource. 5.2.5 Zakat on Livestock Livestock is limited to camels, cows, buffaloes, goats and sheep. No other domesticated animals such as chicken or ducks are liable for zakat. Both the nisab and howl requirements must be fulfilled. The rate is normally 2.5 percent. The calculation is based on the nisab for the number of animals available at the time of collection. For example, if the goats or sheep available at the time of collection is forty then the zakat is one goat or one sheep. But if the number reaches 80, it will be 2 animals, and if 120 it will be 3, and so on. The nisab for camels, cows and buffaloes is 7 animals. 5.2.6 Zakat on Other Forms of Wealth It is interesting to note that the Holy Prophet (peace and blessings of Allah be upon him) did not charge zakat on horses and mules or asses. The main reason is that both these animals were the means of transport. Horses were also used in wars. They were not traded freely as other articles. However, during the time of the Second Caliph, Umar ibn al-Khattab (may Allah be pleased with him) he ordered the people to pay zakat on horses.
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The main reason was that horses became a more common article of trade and hence are paid as a wealth on business or trade and not as livestock. Although there was no apparent rule made by Umar on mules or asses, but if such animals are common articles of trade, then one should pay zakat on the business of it and not as livesock. Similarly, Umar also ordered the payment of zakat on leather although during the time of the Holy Prophet (peace and blessings of Allah be upon him) there was no zakat on leather. But trading on leather or animal skins became a lucrative business that Umar made such a rule. Trading on leather then becomes liable for zakat as well. We know also that there is zakat on honey as an agricultural product. The reason is honey is harvested any time and does not require any effort to produce it except the effort to locate it. Like agricultural produce which does not need any irrigation by the farmer, zakat is paid out at harvest time as long as there is sufficient minimum amount which is the nisab. The rate for such agricultural product is 10%. Hence, the rate for zakat on honey used to be 10% as well. However, these days, honey is being farmed, which requires a place to keep the bees and expenses to feed them. Upon harvesting, zakat needs to be paid out of the total amount of honey, if it fulfils the amount of nisab. Bu the rate of zakat on such honey should be reduced to 5% just like agricultural produce that needs irrigation. We also note that as far as agricultural produce is concerned zakat is only liable on food grains but not on cash crops like rubber, palm oil, cocoa, coffee, tea, etc. we also know that such cash crops produce more wealth than food grains. It would not be fair for farmers of food grains to pay zakat whilst the wealthier corporations of huge estates do not have to pay any zakat on the trading of their estate produce. These agricultural products are liable for zakat as articles of trade at the rate of 2.5%. 5.3 The Zakat Framework From the examples of zakat on horses, leather, other cash crops, chicken and ducks, and even honey, we can discern that there is a framework by which all items of value are liable for zakat. This framework is based on the five main types of zakat namely • • • • •
Zakat on Business or Commerce Zakat on Cash and Savings Zakat on Agricultural Produce Zakat on Mining; and Zakat on Livestock
There are no other independent classifications of zakat, except these five. Hence, there are no other types of zakat that can be introduced. However, to stick to only those items that have been stipulated and practiced by the Holy Prophet (may peace be upon him) would not be fair when practices changed. Hence, the Second Caliph, Umar Ibn Khattab (May Allah be pleased with him) reasoned that as long as the item of value corresponds in character or nature as any of the five classifications of zakat, then that item is liable for 10
zakat in accordance with that classification. This has been the practice of Umar Ibn Khattab (may Allah be pleased with him) and considered as a valid precedent which has been unanimously followed by all jurists. The three famous examples are when he introduced zakat on horses and leather as articles of trade and honey as an agricultural product. 6. CONCLUSION Purifying wealth is not just the giving away part of the wealth that may not have been generated or obtained in a purely Shariah-compliant way. This is only one aspect of it. Such a process would take care only of those wealth that has been generated knowingly or unknowingly in a non-Shariah compliant way. However, there is a more important aspect of wealth purification that needs to be understood. This aspect concerns the strong encouragement that is being propagated by Islam right from the very start, which is to share with those who are not as lucky as you are. They are the poor and the needy. It is here that Islam puts together not only the voluntary spending in the form of normal charity, but also in the form of endowments or waqf that has perpetual benefit to the beneficiaries. Finally, the zakat which is compulsory for every financially able Muslim to pay out in accordance with the Shariah injunctions is certainly a form of purifying not just one’s wealth but indeed oneself from any misdeeds that he may have knowingly or unknowingly committed in the course of the year. The two aspects of wealth purification therefore require parting part of one’s wealth for the benefit of others, whether it is done voluntarily or otherwise. Wallahu a’lam.
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