Canada: Foreign Anti-Corruption Laws In The NAFTA Region

Last Updated: May 1 2012
Article by Henry Chang and Ralph Cuervo-Lorens

Originally published in the North American Free Trade & Investment Report, Vol. 22, No. 2&3, January 31 & February 15, 2012.

As a member of the Organization for Economic Cooperation and Development ("OECD"), Canada signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the "OECD Convention") on December 17, 1997. In order to satisfy its obligations under the OECD convention, the Government of Canada implemented the Corruption of Foreign Public Officials Act1 ("CFPOA"), which came into force on February 14, 1999.

Although the CFPOA may not be as broad as its counterpart in the United States, it is considered more effective than its equivalent legislation in Mexico. A discussion of the CFPOA, in comparison to anti-bribery legislation in these other countries, will appear in the next installment.

Bribery of a Foreign Public Official in Canada The Offence

According to Subsection 3(1) of the CFPOA, every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official:

  1. As consideration for an act or omission by the official in connection with the performance of the official's duties or functions; or

  2. To induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.

According to Subsection 3(2), every person who contravenes Subsection 3(1) is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years. The CFPOA does not provide any specific fines for a violation of this offence. However, pursuant to Subsection 735(1) of the Criminal Code2, a corporation that is convicted of an indictable offense is liable, in lieu of imprisonment, to a fine in an amount that is in the discretion of the courts. As a result, the maximum fine that may be imposed on a corporation is essentially unlimited.

Pursuant to Subsection 732.1(3.1) of the Criminal Code, the Court may also prescribe probation in respect of an organization, requiring that the offender do one or more of the following:

  1. Restitution to a person for any loss or damage caused by the offence;

  2. Establish policies, standards and procedures to prevent subsequent offences;

  3. Communicate those policies, standards and procedures to its representatives;

  4. Report to the court on the implementation of these policies, standards and procedures;

  5. Identify the senior officer who is responsible for compliance with those policies, standards and procedures; and

  6. Make a public announcement regarding the conviction, sentence, and any measures being taken to prevent further offences.

Permitted Payments and Available Defenses Required under the Laws of the Foreign State

Subsection 3(3)(a) of the CFPOA provides for an affirmative defense if the loan, reward, advantage or benefit is permitted or required under the laws of the foreign state or public international organization for which the foreign public official performs duties or functions. In practice, this defense will be of limited applicability since most countries have laws that prohibit the payment of bribes made to their foreign public officials, although the enforcement of those laws may a low priority.

"Reasonable Expenses" Defence

Subsection 3(3)(b) of the CFPOA provides an affirmative defence if the loan, reward, advantage or benefit was made to pay the reasonable expenses incurred in good faith by or on behalf of the foreign public official that were directly related to:

  1. The promotion, demonstration, or explanation or the person's products and services, or

  2. The execution or performance of a contract between the person and the foreign state for which the official performs duties or functions.

Facilitation Payments

According to Subsection 3(4) of the CFPOA, a facilitation payment is permitted if it is made to expedite or secure the performance by a foreign public official of any act of a routine nature that is part of the foreign public official's duties or functions, including:

  1. The Issuance of a permit, licence, or other document to qualify a person to do business;

  2. The processing of official documents, such as visas and work permits;

  3. The provision of services normally offered to the public, such as mail pick-up and delivery, telecommunications services, and power and water supply; and

  4. The provision of services normally provided as required, such as police protection, loading and unloading of cargo, the protection of perishable products or commodities from deterioration, or the scheduling of inspections related to contract performance or transit of goods.

According to Subsection 3(5), an "act of a routine nature" does not include a decision to award new business or to continue business with a particular party, including a decision on the terms of that business, or encouraging another person to make any such decision.

Based on the above, it would appear that facilitation payments would only include payments made to expedite or guarantee the performance of activities that the foreign public official is already required to perform and not to improperly influence his or her decisions in connection with those activities. For example, a fee made to expedite the issuance of a work permit that would have been approved anyway might be considered a facilitation payment. However, a fee made to improperly influence the decision whether or not to approve the work permit would not be considered a facilitation payment.

Areas of Concern

On March 18, 2011, the OECD Working Group on Bribery (the "Working Group") completed a report (the "Working Group Report") on Canada's enforcement of the OECD Convention.3 The Working Group Report raised several concerns regarding the CFPOA, several of which are discussed below.

Bribery Motivated by Profit

The term "business" is defined in Section 2 of the CFPOA as "any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere for profit." In other words, the CFPOA targets the bribery of a foreign public official where the transaction is motivated by profit. Canada is the only party to the OECD Convention that includes such a requirement in its anti-bribery legislation.

According to the Working Group Report, it was unclear whether the "for profit" requirement applied to the transaction in a particular case, or the nature of the entity that bribed a foreign public official. For instance, it was not clear whether the CFPOA would apply if a profit was not obtained as a result of the foreign bribery transaction in question and/or if a non-profit or government controlled entity did the bribing.

Although this issue should be clarified by the Government of Canada (through guidelines or amendments to the legislation) or by the courts, the underlying purpose of this limitation should be to exclude bribes made by charitable entities for the purpose of facilitating their humanitarian objectives. This is a purpose that is worth protecting.

"Reasonable Expenses" Defence

How the Government of Canada would apply the "reasonable expenses" defence was one issue of concern. The Working Group observed a certain amount of confusion within the private sector regarding the purpose and scope of the defence for "reasonable expenses."

For example, some companies believed that payments, which would clearly be improper, fell within the reasonable expenses exception if not tied to a specific transaction, but rather to foster a positive business relationship in the long-term. However, according to Canadian authorities such payments were not "reasonable expenses" as defined in the CFPOA, since they were not directly related to the objectives mentioned in the defence.

The Working Group Report explained that Canada has considered issuing guidance on the operation of the "reasonable expenses" defence but, consistent with its longstanding practice of not issuing advisory opinions on criminal matters, it has determined that it will not do so in this case.

"Facilitation Payments"

The Working Group remained concerned that the language of this exception created a high level of uncertainty for some businesses. It had previously concluded that the "facilitation payment" exception might affect the implementation of the Convention and recommended that Canada consider issuing some form of guidance in the interpretation of the defence. According to the Working Group Report, Canada has explained that it is the longstanding practice of the Canadian government to not issue guidelines on the interpretation of criminal law provisions and that the courts alone are responsible for interpreting the application of the law to individual cases.

The Working Group found that the extractive industries (i.e. mining, oil, and gas industries) demonstrated a good understanding of the scope of the exception for "facilitation payments." To some extent, this level of understanding was due to a high level of knowledge within the industry regarding a similar provision in the United States' Foreign Corrupt Practices Act of 19774 ("FCPA"); since many of those companies were listed on a United States stock exchange, they were also subject to the FCPA. However, it was believed that small and medium enterprises were unlikely to understand the meaning and parameters of the "facilitation payments" exception.

Jurisdictional Issues

The Canadian legal system applies a relatively restrictive territory-based principle when determining whether it will extend criminal jurisdiction to offences that take place outside of Canada. The leading case on this principle, in the context of criminal offences, is R. v. Libman.5 In that case, the Supreme Court of Canada stated that, for an offence to be subject to the jurisdiction of Canada, the court must consider:

  1. All relevant facts that took place in Canada, which might give this country an interest in prosecuting the offence; and

  2. Whether or not anything in those facts offended against international comity.

The Working Group had previously found that the jurisdiction in Canada was much narrower than for most other OECD Convention parties, which also provided nationality-based jurisdiction over foreign bribery offences. It again concluded that, so long as nationality jurisdiction is absent in Canada, foreign bribery prosecutions may fail for lack of a sufficient jurisdictional link over the acts in question.

Recent Enforcement Efforts

The prosecution of Niko Resources Ltd. ("Niko") under the CFPOA has garnered a great deal of attention. In addition to being the first significant prosecution under Canadian anti-bribery legislation, the case and its outcome also suggest that, despite the complexity and cost of what are often multi-country investigations over several years, more vigorous enforcement of anti-corruption legislation may soon be the norm in Canada.

Last year, Niko pled guilty to a charge of bribery under the CFPOA in connection with events surrounding an explosion that took place at Niko's natural gas field in Bangladesh. The company was fined nearly $9.5 million (Cdn.) and was made subject to an extensive probation order, which is further discussed below. Because Niko entered a guilty plea, thus sparing the state from conducting a full prosecution, the fine imposed was less than it would otherwise have been. The extent and magnitude of the sentence also turned on the fact that, as far as it could be determined, no real benefit accrued to Niko from the prohibited activities at issue.

The Court's view of this type of offence was made clear at the sentencing hearing.

"Bribery,"the Court said, "tarnishes the reputation of Alberta and of Canada [and] ... is an embarrassment to all Canadians. . . .the fact that a Calgary-headquartered oil and gas company has bribed a foreign government official is a dark stain on Calgary's proud reputation as the energy capital of Canada."

The context for the offence was that, at the time of the explosion, Niko was in negotiations over a gas pricing contract with the Bangladeshi government. The specific conduct at issue related to two sets of benefits provided through Niko's local subsidiary to the Bangladeshi Minister of Energy: (1) a $190,984 SUV vehicle and (2) payment of a trip to Energy Expo in Calgary and on the way also to New York and Chicago to visit relatives (the total value of which were in the range of $196,000). The benefits were found to have constituted "bribes" within the meaning of the legislation.

As noted elsewhere, the offence under CFPOA requires a "real and substantial" connection to the territory of Canada. This requirement has been a limiting factor to successful prosecutions in the past. However, in the Niko case, the issue was conceded. For the purposes of the guilty plea and the joint submission on sentence, the parties agreed that the required link between the offence and the territory of Canada was made out based on the fact that Niko funded the bribes by its subsidiary and knew of their purpose.

As part of the penalty, the Court imposed a probation order with far reaching consequences. To the authors' knowledge, a probation order of this type has not been previously imposed in Canada. The terms of the order included an obligation to report suspicious activity and even assist law enforcement. But it is the measures dealing with future compliance that are of particular interest from the point of view of risk management. Niko was ordered by the Court to establish an anti-corruption compliance code aimed at preventing future violations.

Among other things, the anti-corruption code was to include (1) a written policy against violations and compliance standards and procedures applicable to all directors, officers, employees, and outside parties acting on behalf of the company and (2) explicit policies and detect/control systems regarding gifts, entertainment expenses, customer travel, political contributions, charitable donations, sponsorships, etc. The code is explicitly to be put into place under the direct supervision and responsibility of senior management and the board of directors. It is also to be extended by design to all of the company's partners and agents. It is noteworthy that Niko was ordered to undertake a risk assessment prior to designing and implementing anti-corruption measures so that any measures taken are based on company-specific risks and are not just implemented at large.

Another notable feature of this case was the close cooperation of Canadian and U.S. authorities (the prosecutor described the case as a "joint effort" with the U.S. Department of Justice). The probation order arguably represents an Americanization of the legal process in this area as it was closely modeled on U.S. approaches to anti-corruption enforcement action under the United States' FCPA, discussed below.

Niko is not the only instance of the CFPOA enforcement action by Canada's federal police. Information from a variety of sources suggests there are a number of other investigations of this type presently underway.

In light of these developments, it is sound advice to suggest that Canadian companies active abroad should be assessing with great care their potential exposure to foreign corruption laws and the sanctions that might be imposed. At a minimum, companies with even the minimum of linkages to Canada should put in place effective company-wide awareness, monitoring and compliance measures similar to those imposed on Niko.

We note that heightened anti-corruption measures are not unique to Canada. As noted in the next installment, other countries in which Canadian business interests are often active have also stepped up their regulation and enforcement in this area.

Conclusion

Although Canada's recent efforts to enforce the CFPOA are now beginning to show tangible results, it can still find some inspiration in the United States. Although several areas of concern remain, including Canada's failure to apply jurisdiction based on principles of nationality, the CFPOA is still more effective than its equivalent legislation in Mexico. The issues specific to the U.S. and Mexico will be covered in the next edition.

Footnotes

1 S.C. 1998, c. 34.

2 R.S.C. 1985, c. C-46.

3 See http://www.oecd.org/dataoecd/55/25/47438413.pdf.org/dataoecd/55/25/47438413.pdf.

4 15 U.S.C. §§78dd-1, et seq.

5 [1985] 2 S.C.R. 178.



Foreign Anti-Corruption Laws In The NAFTA Region

[Editor's note: In the January 31, 2012 edition of NAFTIR , we discussed the Corruption of Foreign Public Officials Act1 ("CFPOA"), implemented by the Government of Canada, in comparison to anti-bribery legislation in the other NAFTA countries. In this article we will cover the issues specific to the United States and Mexico.]

Anti-Corruption Laws in the United States

The Foreign Corrupt Practices Act (FCPA) was enacted in 1977 and was revised in 1988 when the United States signed the OECD Convention. The FCPA contains anti-bribery provisions that make it illegal for U.S. persons to bribe a foreign government official for the purpose of obtaining or retaining business.

The Basic Prohibition

With respect to the basic prohibition, there are five elements that must be satisfied in order to establish a violation of the Act.

  1. A payment, offer, authorization, or promise to pay money or anything of value;

  2. To a foreign government official (including a party official or manager of a state-owned concern), or to any other person, knowing that the payment or promise will be passed on to a foreign official;

  3. With a corrupt motive;

  4. For the purpose of:

  1. Influencing any act or decision of that person;

  2. Inducing such person to do or omit any action in violation of his lawful duty;

  3. Securing an improper advantage; or

  4. Inducing such person to use his influence to affect an official act or decision;

  1. In order to assist in obtaining or retaining business for or with, or directing any business to, any person.

Permitted Payments and Affirmative Defenses Facilitation Payments

The FCPA makes an exception for payments intended to facilitate or expedite performance of a "routine governmental action." "Routine governmental action" does not include any decision by a foreign official to award new business or to continue business with a particular party. The FCPA lists the following examples of permissible facilitation payments:

  1. Obtaining permits, licenses, or other official documents;

  2. Processing governmental papers, such as visas and work orders;

  3. Providing police protection, mail pick-up and delivery;

  4. Providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and

  5. Scheduling inspections associated with contract performance or transit of goods across country.

Actions "similar" to these examples are also covered by the exception. The language used to describe these facilitation payments is virtually identical to what appears in the CFPOA.

Payment Permitted in the Foreign Country

The FCPA provides an affirmative defense where the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country. The language used to describe this affirmative defense is virtually identical to what appears in the CFPOA.

Reasonable Expenses

The FCPA also provides an affirmative defense where the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to:

  1. The promotion, demonstration, or explanation of products or services; or

  2. The execution or performance of a contract with a foreign government or agency thereof.

The language used to describe this affirmative defense is virtually identical to what appears in the CFPOA.

Jurisdiction

The FCPA applies to both "domestic concerns" and "issuers" even when acting outside the United States. The term "domestic concerns" includes any individual who is a citizen, national, or resident of the United States. It also includes any corporation, partnership, association, jointstock company, business trust, unincorporated organization, or sole proprietorship with its principal place of business in the United States or organized under the laws of a state of the United States or a territory, possession, or commonwealth of the United States. An "issuer" is a corporation that has issued securities registered in the United States or who is otherwise required to file periodic reports with the Securities and Exchange Commission ("SEC").

Issuers and domestic concerns may be held liable under the FCPA under principles of either territoriality or nationality:

  1. For acts occurring within the United States, issuers and domestic concerns are liable if they act in furtherance of a corrupt payment to a foreign official using the U.S. mails or other means or instrumentalities of interstate commerce (including telephone calls, facsimile transmissions, wire transfers, and interstate or international travel).

  2. Issuers and domestic concerns may also be held liable for any act in furtherance of a corrupt payment outside the United States. In other words, they can be held liable for a corrupt payment occurring without any involvement by personnel located within the United States.

Prior to 1998, foreign corporations (other than "issuers") and foreign nationals were not subject to the FCPA.

However, as a result of amendments passed in 1998, a foreign company or person is now subject to the FCPA if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the United States.

The United States clearly takes a much broader view of jurisdiction in its enforcement of the FCPA than Canada in its enforcement of the CFPOA.

Penalties

The following criminal penalties may be imposed for violations of the anti-bribery provisions:

  1. Corporations and other business entities are subject to a fine of up to $2,000,000.00USD.

  2. Officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000.00USD and imprisonment for up to five years.

Fines imposed on individuals may not be paid by their employer or principal. Under the Alternative Fines Act, the actual fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment.

The Attorney General or the SEC may also bring a civil action for a fine of up to $10,000 against any firm as well as any officer, director, employee, or agent of a firm, or stockholder acting on behalf of the firm, who violates the anti-bribery provisions of the FCPA. Additional fines may be imposed in an SEC enforcement action. The Attorney General or the SEC may also bring a civil action to enjoin any act or practice of a company whenever it appears as though the firm (or an officer, director, employee, agent, or stockholder acting on behalf of the firm) is or will be in violation of the anti-bribery provisions contained in the FCPA.

Under guidelines issued by the Office of Management and Budget, a person or firm found in violation of the FCPA may be barred from doing business with the Federal government. In addition, a person or firm found guilty of violating the FCPA may be ruled ineligible to receive export licenses. The SEC may also suspend or bar persons from the securities business and impose civil penalties on persons in the securities business for violations of the FCPA.

Anti-Corruption Laws in Mexico

Anti-corruption initiatives and legislation in Mexico have increased significantly since 2000, culminating in the passage of Mexico's first federal anti-corruption law in May 2011. While the legislation represents a major step forward for Mexico, it falls short of the breadth and reach found in its U.S. or Canadian counterparts.

This likely can be attributed to the challenges of reforming a culture where corruption in many sectors of the economy has essentially been institutionalized. It is probably also fair to point out that for Mexico the larger concern is often local government corruption (of which bribery is only a part) rather than the regulation of private sector activities whether local or overseas.

Mexico's federal Anti-Corruption in Government Contracting law has several important features. It applies to individuals (shareholders, partners, legal representatives, agents, advisors, subcontractors, employees or others) and legal entities (corporations, trusts, partnerships, etc.), whether Mexican or foreign, engaged in federal government contracting. Perhaps more importantly, it also applies to international business transactions (although it remains to be seen how actively these provisions of the law will be enforced).

Prohibited acts under the new law include offering or paying money to a government official to carry out or omit to carry out an act related to the official's functions, obtaining an improper benefit or advantage in federal government contracting processes, and participating in public bids despite being prevented from doing so. For individuals, penalties can consist of fines ranging from approximately $5,000USD to $250,000USD or 30% to 35% of the amount of the government contract at issue. For corporations and other legal entities, the fines can range from US$50,000 to US$10,000,000 or 30% to 35% of the amount of the government contract. In addition, anyone found guilty of corruption may face disqualification from all federal government contracting for a period of 3 months to 5 years.

The anti-corruption regime in Mexico lacks some of the measures available to governments in other countries in this type of legislation. For example, Mexico lacks an effective mechanism for the confiscation of bribes and other ill-gotten gains and it remains unclear under Mexican law whether bribes given to foreign officials may be deducted for tax purposes. Mexico also lacks legislation to protect whistleblowers in both the public and private sectors from reprisals. The country has not put in place rules requiring external auditors to report crimes discovered during corporate audits or providing auditor immunity to those who do report such activities. As with Canada, Mexico does not have a civil enforcement mechanism allowing the government to recover gains or benefits accrued to the wrongdoer as a result of prohibited conduct nor does it have specific obligations regarding the maintenance of the records necessary to detect prohibited activity (as does the U.S. legislation for example).

On the other hand, bribery of a public official is a criminal offence under the federal criminal code as well as that of every state in Mexico. Depending on the amount at issue, the penalty can include incarceration for up to 14 years. Mexico also has laws, at both federal and state levels, which are enforceable against public officials. The sanction for unlawful conduct by an official can include disqualification from public service for up to ten years.

Mexico is also party to the OECD Convention. The OECD Convention requires Mexico to investigate and prosecute (under its criminal law) bribery committed by Mexican nationals overseas or bribery that takes place overseas and benefits Mexican nationals. As recently as last October, the OECD as part of its country monitoring report (provided for under the Convention) noted that while Mexico has certainly improved, it needs to give greater priority to criminal enforcement of bribery and also ensure that its criminal law enforcement authorities have all the resources and expertise needed to vigorously investigate allegations.

It is perhaps as a result of these OECD commitments that international business transactions were specifically listed as one of the areas subject to the new federal anticorruption law passed last May.

Conclusion

Heightened anti-foreign corruption laws are not unique to the NAFTA region. Countries such as the UK have introduced similar legislation and often with stricter standards and heavier penalties. With all of these developments in mind, there can be little question that for companies doing business abroad this area of the law will continue to take on added importance. It would be sound advice, in our view, that any company doing or hoping to do business abroad should carefully assess their potential exposure to foreign anti-corruption laws and the sanctions that could be imposed. Companies with even minimal linkages with the foreign country should, as a matter of sound risk management, put in place effective company-wide measures focused on awareness, monitoring and compliance if they are to stay on the right side of this developing area of the criminal law.

1 S.C. 1998, c. 34.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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