Fronting

‘Fronting means a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes. Fronting commonly involves reliance on data or claims of compliance based on misrepresentations of facts, whether made by the party claiming compliance or by any other person.’  (South Africa. Department of Trade and Industry, no date)

Fronting practices can include amongst others window-dressing, benefit diversion or transfer pricing, opportunistic intermediaries, thin capitalisation, corporate social investment, employment equity and preferential procurement. Some of these are explained in more detail below. Anyone who issues an invalid B-BBEE certificate or misrepresents their B-BBEE position would be guilty of fronting. All these practices are employed to mimic compliance with the legislation to achieve the business’ economic goals. However, they undermine the BEE legislation’s intention of redressing the imbalances of the past, by the meaningful participation of black people and black–owned businesses in the mainstream economy.

Window-dressing is employed where black employees are promoted to positions to enhance a company’s points on the scorecard for the Ownership and Management Control elements, rather than there being any substance to the promotions. Typically, those employees and/or shareholders are unaware of their new roles in the company and they have no authority in their new positions. Their salaries are significantly lower than the market standard for other managers/key persons in the company and when compared to other companies in the industry.

The re-appointment of white managers as contractors can be used to dilute the number of white employees used in the calculation of the Employment Equity element on the scorecard, as it creates the impression of having a higher percentage of black employees but the substance of the working arrangement is unchanged.

As the threshold for Exempted Micro-Enterprises (EME’s) is R5m, the independent contractors would be exempt from BEE contribution, as their fees would be below R5m. Their inclusion in the supply chain would enhance that same company’s Preferential Procurement score as EME’s have an automatic recognition of BEE status Level Four, giving the company a procurement recognition level of 100%.

Thin capitalisation takes place where excessive interest rates in excess of the market rates for similar business loans are charged by a “white-owned” company on monies loaned to an empowered company to effectively strip the profits out of the empowered company.

Companies give incorrect information to the verification agency about turnover, management, employees and other elements to fraudulently enhance their scorecard rating. Many companies deliberately understate their turnover to qualify as an Exempt Micro Enterprise (EME) as an EME is automatically allocated a Level Four rating. Companies use the same fraudulent mechanism to be rated as a Qualifying Small Enterprise (QSE) rather than a Generic Enterprise.

It seems that fines imposed by the government or the cancellation of contracts have not been effective either in combating fronting, as companies budget for fines or simply reinvent themselves and continue to do business in the private sector.

All these examples illustrate how companies are able to put structures in place to enhance their BEE recognition scores, to achieve greater returns for their companies and consequently, their personal wealth, through fraudulent and/or unethical practices that undermine the objectives of BEE.

Companies can be charged with fraud, or even corruption in terms of the Corruption Act, if they intend to use their BEE certificate in an illegal manner to make profits. And the Broad-Based Black Economic Empowerment Amendment Bill 2011 seeks to criminalise fronting practices.

The Department of Trade and Industry (dti) has released its required procedures to be followed for reporting fronting practices. These include reporting the practice to the Fraud hotline or the dti’s B-BBEE unit in writing, where there is no satisfactory explanation obtained by the Verification Agency from the Measured Entity. The dti may then completely disregard or suspend the Measured Entity’s scorecard until corrective action has been taken. It will also keep a database of all companies found to be engaged in fronting.

Print Friendly, PDF & Email
Short URL to this article: http://tinyurl.com/8zoy2p7

All material subject to our Legal Disclaimers.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.