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My mechanism for this conversion is an intramolecular attack sn2 to displace Cl- anion. OH- can then attack this aziridinium intermediate, but will the nucleophile not attack preferentially at the most substituted site (where greatest positive charge resides i.e. tertiary center)? This gives the incorrect product?

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Steric factors are more important here. The positive charge resides on the N and the nucleophile attacks the least hindered site hence the product is as drawn.

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