A not-so unique way of fronting

Original publish date – Tue, 30 Oct 2012 15:01:50 +0000, Keith

Many companies are hooking into what they consider a unique way to front and misrepresent their BEE status.

The BEE codes define an EME (exempt micro enterprise) as one that has an annual turnover of less than R5 million. The codes also state that a start-up must be measured as an EME in the first year following their formation or incorporation.

Section 6 of Code 000 states:

6    Start-up enterprises

6.1    Start-up enterprises must be measured as Exempted Micro-Enterprises under this statement for the first year following their formation or incorporation. This provision applies regardless of the expected total revenue of the start-up enterprise.

6.2    Start-up Enterprises are deemed to have a B-BBEE Status of “Level Four Contributor’ having a B-BBEE procurement recognition of 100% under this paragraph

6.3    In order to qualify as a Start-up Enterprise, the enterprise must provide an independent confirmation of its status.

6.4    Despite paragraph 6.1 and 6.2, Start-up Enterprises must submit a QSE Scorecard when tendering for any contract, or seeking any other business covered by section 10 of the Act, with a value higher than R 5 million but less than R35 million. For contracts above R35 million they should submit the generic scorecard. The preparation of such scorecards must use annualised data.

The idea that many companies have is to form a new business, that does the exact same work as the old business, but regard themselves as an EME in the first year.

What they don’t know is that “start-up enterprise” is defined in the codes as:

Means a recently formed or incorporated entity that has been in operation for less than one year. A start-up enterprise does not include any newly constituted enterprise which merely a continuation of a pre-existing enterprise;

Note the grammar error “which merely a continuation”.

Also paragraph 2.5 of Code 000 states:

2.5    Initiatives which split separate or divide enterprises as a means of ensuring eligibility as an Exempted Micro-Enterprise, a Qualifying Small Enterprises or a Start-Up Enterprise are a circumvention of the Act and may lead to the disqualification of the entire scorecard of those enterprises concerned.

This has not stopped hundreds of companies choosing to ask their verification  agency for an EME status. Some companies are getting quite innovative. They don’t inform their verification agency that they are a start-up – they simply produce audited statements for the first year of operation of this new business. If they have not fully transferred their activities across to this new entity, then the entity will have a turnover of less than R5 million and be an EME. The Codes for Complex Structure and Transactions & Fronting do talk about how complex structure should be verified.

It is certainly a circumvention of the Act to produce or issue an EME certificate if the entity is not an EME.

The B-BBEE Amendment Bill makes allowances for up to 10 years in jail for fronting offenses.

 

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