Following on from our previous newsletter where we criticized the B-BBEE Commission for not taking sufficient action against the scourge of fronting, the Commission has now issued a media statement naming 17 companies that are currently being investigated for possible fronting practices and non-compliance with the B-BBEE Act.
The media statement gives a short summary of each possible fronting practice – the majority of which revolve around ownership schemes and trusts. The media statement gives no more detail, but it would appear that the Commission has finally taken action, particularly around suspect ownership schemes we have always been concerned about.
A number of verification agencies are also on the list over either their own schemes or practices during verification.
What does this mean?
The B-BBEE Commission is getting serious about fronting. They have taken a tiny sample of issues they have received, but this should be enough to make everyone involved think twice about whatever BEE activity they wish to implement. The Commission clearly states the penalties applicable if there is ever a court case – up to 10 years in jail, and 10% penalty of annual revenue.
Most likely the Commission will find some of the companies named not guilty of any offense, but there will be some that have taken shorts cuts, or attempted to circumvent the codes and may be prosecuted. This will go a long way to making companies more wary of undertaking some of the suspect initiatives we have previously identified and spoken against.
What is Fronting?
According to the B-BBEE Act:
‘fronting practice’ means a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act or the implementation of any of the provisions of this Act, including but not limited to practices in connection with a B-BBEE initiative—
(a) in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;
(b) in terms of which the economic benefits received as a result of the broad-based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;
(c) involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or
(d) involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which—
(i) there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;
(ii) the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
(iii) the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis;
‘knowing’, ‘knowingly’ or ‘knows’, when used with respect to a person, and in relation to a particular matter, means that the person either—
(a) had actual knowledge of that matter; or
(b) was in a position in which the person reasonably ought to have—
(i) had actual knowledge;
(ii) investigated the matter to an extent that would have provided the person with actual knowledge; or
(iii) taken other measures which, if taken, would reasonably be expected to have provided the person with actual knowledge of the matter;’’;
Note the last clause “knowing”. A person can be guilty even if they did not know they were fronting, because they “ought to have known”. A CEO ought to know enough about BEE and fronting to not “make mistakes”. This applies even if the company has been advised by lawyers or consultants. Effectively this is a case of ignorance of the law is no excuse. We know that there is so much fronting taking place – this hurts not only the true cause of transformation, but the honest companies that try to do it right, and lose business to the unethical ones.
In our case, our consulting services always look at any BEE activity from the viewpoint of avoiding accusations of fronting. In some cases it is easy to identify fronting, but sometimes fronting is notoriously difficult to prove.
The dti has put out a document summarizing “Fronting Indicators”. It will well worthwhile reading this document to ensure that no activity falls foul of the law.
If you need help in your BEE activities our consultants understand the issues and will be able to guide you through this process, avoiding breaking of any law and getting the best possible level.