BEE fronting getting increasingly sophisticated in face of new law
By Stephen Timm on 12 October 2013 in News by Small Business Connect
GONE are the days when fronting simply meant white business owners passing off their gardeners as company directors. These days, business people and rating agencies are using far more subtle techniques to get around black economic empowerment (BEE) legislation, often involving complex accounting and company restructuring.
When the Broad-based Black Economic Empowerment (B-BBEE) Amendment Bill, which is currently before Parliament, is passed, it will make fronting an offence, with fines of at least 10% of a company’s turnover or jail terms of at least 10 years.
The bill also allows for the setting up of a BEE Commission to investigate instances of fronting.
BEE consultant and EconoBEE chief executive Keith Levenstein says the bill will make a “huge difference” in curbing fronting.
“All we need is the first court case and first person to go to jail, and people will be scared of fronting,” he said.
Levenstein says his consultants reject between two and three certificates a day, but that of the 40 000 BEE certificates on his database, only one in 50 need to be further investigated for possible fronting.
Many company heads and rating agencies explain these as “mistakes” made in the rating process.
However, Levenstein questions this, singling out the recent example of one company chairman who paid R2 500 to have a BEE certificate drafted within one day, by someone he met in a chance encounter who was not even from an accredited verification agency.
Levenstein said many of those with questionable BEE scorecards are big companies that try to pass themselves off as qualified small enterprises (QSE) so that they can be rated under the less onerous QSE scorecard.
Similarly, many QSEs try to pass themselves off as exempted micro-enterprises (EMEs) so that they are not obligated to get a BEE scorecard.
The Department of Trade and Industry’s (DTI) BEE unit has, since 2009, received 268 complaints of fronting, with the department intervening to mediate in just under half of these cases.
The department said that a lack of supporting evidence and co-operation from parties involved meant that only 9% of the cases were settled amicably with out-of-court settlements. Thus far, no complaints have been referred to the National Prosecuting Authority.
Meanwhile, the department is at an advanced stage to collaborate with the police to assist with the investigation of fronting-related matters, while awaiting the establishment of the BEE Commission.
New forms of fronting
Various other forms of common fronting include:
- Forged certificates bearing names of well-known verification agencies.
- The use of unaccredited verification agencies. Those running such agencies can be sentenced to up to two years in prison under the Accreditation Act. Check if an agency is accredited by visiting www.sanas.co.za or www.irba.co.za.
- Opting to use the BEE codes of good practice rather than the sector codes.
- Using old or future financial year data to ensure that one’s turnover comes in below the threshold for generic codes or QSE codes.
- Using employee trusts where the ultimate beneficiaries are not black people.
- Putting employees into positions where they do not hold similar responsibilities or get similar rewards to white people in the same positions.
- Misrepresenting training costs. For instance, counting Seta grants as training spend, or counting training done by labour brokers or creating a training expense such that the learner then either does not attend or has a fabricated invoice.
- Misrepresenting procurement spend by counting imports or by using invoices from a supplier BEE shell company to derive an inflated score or counting a third party’s BEE status. A common example is where a company that spends money on its credit card applies the bank’s BEE status, instead of looking at the BEE status of each individual supplier.