Fraud and fronting
Original publish date – Fri, 27 Jul 2012 14:08:26 +0000, Keith
B-BBEE Fraud and Fronting
Fraud and fronting is quite prevalent in the B-BBEE sphere. The expectation initially was that it would be self-regulating. The B-BBEE act and codes do not make sufficient allowance for legal regulation. Anyone who issues an invalid B-BBEE certificate or misrepresents their B-BEE position would be guilty of fronting. The dti and National Treasury have threatened to create a black list of such companies, but this has not worked to any great extent. There is no doubt that B-BBEE fronting is fraud – a company that deliberately issues an incorrect BEE status, and companies can be charged with fraud, or even in terms of the corruption act if they intended to use their BEE certificate in an illegal manner to make profits.
The hope was that companies, competitors, verification agencies would identify fronting activities and stamp it out. This has not happened. If a BEE certificate is presented to a company, it is usually, without question accepted. In some cases companies are checking, and may reject the certificate. Consultants and verification agencies too, often reject certificates that they deem invalid. Few however bother to investigate and report this to the dti. We are one of the few that do report, as per dti guidelines any infringement.
The proposed B-BBEE Amendment Bill, expected to be passed in parliament shortly does indeed criminalise fronting. The bill establishes the office of a B-BBEE Commissioner who is empowered to investigate and prosecute offenders. This however may only happen in one of two years time, after the bill is passed, the BEE Commissioner appointed, budgeted for and staffed properly.
Types of fronting
Companies are guilty of many types of fronting:
Ownership: Shares are sold/given to a black partner who is unaware of his duties/rights or even that he is a shareholder. In some cases the black partner has been forced to sign his sell agreement so the company can “take back” the shares when they wish
General misrepresentation: Companies give incorrect information to the verification agency about turnover, management, employees.
Exempt Micro Enterprise (EME) fraud: An EME is one that has a turnover of less than R5 million (depending on industry) and is automatically allocated level 4. Many companies deliberately understate their turnover in order to qualify as an EME. An extreme case was a R1.2 billion company that said its turnover was less than R5 million – and won business as a result of its BEE status
Qualifying small enterprise fraud (QSE): A QSE is one that has a turnover of between R5million and R35 million (depending on industry). Companies us the same fraudulent mechanism as for EMEs above.
Unaccredited verification agencies: A certificate is only valid if produced by an accredited verification agency. Agencies are accredited by SANAS or approved by IRBA. Many unscrupulous unaccredited agencies offer to produce genuine looking certificates without following any verification procedures. We have seen unaccredited agencies illegally using the SANAS logo. One non-accredited agency created a standard certificate showing 77 points and used “mail-merge” to put the names of his clients onto it. Companies may say they were scammed by these con artists, but when it is pointed out to them that their certificate remains invalid, they continue to issue it, effectively participating in the fraud and fronting process. Often companies will call in these con artists because they know they will not perform any verification checks, or even give them the level they need. Many of these “agencies” are incompetent. An extreme example was an unaccredited agency whose one page certificate had 20 mistakes.
Responsibility to report Fronting
The dti Code obligate companies and verification agencies to report fronting. Reporting is towards SANAS (who do try to take action where the offense related to SANAS), IRBA (who are new in the arena and tend to take less action) , the sector councils (who seem ot feel they have little power to investigate or take action), and the dti (who also feels that they have too little power. The reality is the current B-BBEE act requires that government “take into account and where possible apply” a BEE certificate when awarding tenders, concessions, licenses or similar activities.