Fronting is once again rearing its ugly head – EconoBEE Newsletter – 24 August 2011

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Fronting is once again rearing its ugly head

Fronting is defined by the DTI as a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes. We continue to see this happening and have reported at least 20 instances to the dti and SANAS in the past months.

 

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The dti and SANAS acknowledge and promise an investigation. Unfortunately that is usually as far as it goes. Most of our queries are ignored. It does not take a brain surgeon to suspect something is amiss if the business calls itself a project and construction managment, which implies that it should follow the construction BEP codes, yet does not. This particular issue has been sitting with the dti since May. It’s a big deal because this company is a QSE in terms of the generic codes, but would be a generic in terms of the BEP codes, and therefore its scorecard is about 60% higher than it should be.

Emails to the dti and SANAS are met with “We’ll investigate”. If they do investigate, they usually do absolutely nothing. South Africans, even the president complains, rightfully, about corruption. Government’s inability to stop fronting is yet another form of condoned corruption. We have written to the minister numerous times and while we have received a response, we would far rather he take action, than politely acknowledge our letter.

Fronting is becoming more devious: Some of the types of fronting we commonly come across are:

  1. EME fronting.
    • Companies create new entities, and transfer all old assets into them, thus creating a “start-up”. Many agencies and accountants do not check if it is “merely a continuation of an existing business”, in which case it is not a start-up. They simply issue a certificate. The verification manual states that all agencies must conduct an on-site visit to verify the entity. However, SANAS has not accredited an agency for code 000 (where the definition of an EME is contained), allowing them to by-pass the SANAS requirements for a site visit. Often a simple visit to the business will give a good indication if the business is an EME (turnover of less than R5 million, depending on sector).
    • If the business has 50 staff, there has to be a question mark around its EME status.
    • If the business has one customer which spends R6 million a year with it, there has to be a query if it says that its turnover is less than R5 million!
    • In one case we found that the accountant based his “letter” on VAT figures supplied by his client showing that his client is not only cheating on B-BBEE, but also cheating on the taxman which is really cheating every other South African.
  2. QSE Fronting.
    Companies deliberately show a turnover of less than R35 million, depending on sector.
  3. Sector code Fronting:
    Companies and verification agencies producing a certificate based on the wrong set of codes. This often is due to the agency not having the required accreditation for the sector that his client belongs to. Ironically the agency will deny any wrongdoing, but quickly get his accreditation and from then on will verify his clients using the correct sector codes.
  4. Forging certificates
    Isolated companies are still forging certificates.

Before we report an issue to the dti, we investigate it fully to ensure that we do not waste the dti’s time, and do not accuse any business falsely. We do this because we are concerned about fronting, but also because we do not want our clients to earn points from invalid certificates, and then themselves get accused of questionable practices. We try to evaluate every certificate we receive. While we have probably missed many questionable certificates, we have queried far more. We use many techniques to evaluate a certificate:

  • We check how much our client spends with the entity. If our client spends R4.7 and the entity says it is an EME, it can only be an EME if our client is the entity’s sole customer.
  • We check the entity’s web site, but recognize that many web sites exaggerate. One company stated that it was the largest suppliers of washroom systems to “A” grade buildings in the country, and also an EME!
  • We even use Google Maps and street view to get an indication of the size of the business. We discovered one company operates from home so we were satisfied that its EME status was fine.
  • We often ask both our client and the company, or its accountants for an explanation. One accountant gave us a letter showing the company to be a level 3 EME. On querying he told us that the company does not have any black ownership, so the company could not be a level 3.

Only after we have done the work do we send this to the dti for further investigation. We report these incidents regularly to the dti, and SANAS, and almost nothing gets done about it. There is still no blacklist, as promised by the minister. There is no publicly available database of invalid or withdrawn certificates. Once a certificate is withdrawn by an agency, they usually email their fellow verification agencies, but there is no procedure to stop an agency, or entity from using an invalid certificate.

Conclusion: It is with regret that we are now calling on the President and the BEE Council to take genuine and decisive action against the dti. Maybe we need a new minister, or B-BBEE needs to be moved to the Treasury Department. SARS is working efficiently, so maybe minister Gordhan can do a better job of B-BBEE than the dti. Treasury is also responsible for the PPPFA, so it does make sense for this ministry to manage B-BBEE.

We remain committed to transformation, as we always have. We are totally dejected that the dti is ruining such a good policy.

 

 


 

 

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EconoBEE Newsletter
24 August 2011

In this issue

  • Fronting is once again rearing its ugly head

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