B-BBEE fronting has been identified as a significant risk to the success of the Broad-Based Black Economic Empowerment (B-BBBEE) policy. To mitigate this risk, the B-BBEE Amendment Act (the Act), which came into effect on 24 October 2014, established the B-BBEE Commission, whose function is to support the interpretation and correct implementation of the B-BBEE legislative framework. The B-BBEE Commission will also have the mandate to ‘police’ fronting practices, which have been criminalised in the Act.
On 29 March 2016, the B-BBEE Commission hosted a conference on B-BBEE fronting to highlight the extent to which it undermines B-BBEE policy. The outcome of fronting is the entrenchment of the ownership patterns and management structures that have been inherited from Apartheid, which in turn inhibits the country’s ability to build an inclusive, competitive and vibrant economy.
The purpose of this article is to define fronting and the B-BBEE Commission’s powers to address it. The structuring of B-BBEE transactions in accordance with the spirit of B-BBEE is a challenging task, given the need to balance competing interests. Over the last ten years, Transcend Capital has developed deep expertise in B-BBEE advisory and is properly positioned to advise clients on how to effectively balance competing interests in order to arrive at B-BBEE solutions that reflect the values of the underlying business and the spirit of B-BBEE.
What is B-BBEE fronting?
Fronting is the fraudulent misrepresentation of a company’s B-BBEE credentials with a view to obtaining a benefit, whether financial or otherwise. The Act defines a B-BBEE fronting practice as “a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act, …”. The possible penalty for a fronting conviction may be imprisonment for a period not exceeding 10 years, and/or a fine as high as 10% of annual turnover.
Extent of the problem
In his opening address at the fronting conference, the Deputy Minister of the dti indicated that fronting practices have become so ubiquitous in some economic sectors that they are considered as the correct way of implementing B-BBEE. Panellists at the conference were of the view that there are instances of fronting that are easily recognisable, for example, the appointment of domestic workers as C-suite executives (without the commensurate rights and obligations) with a view to increasing the number of black executives in an organisation. However, there are many less obvious instances in play that include:
- Implementing ownership transactions with long lock-in periods, during which little or no economic benefits are enjoyed by the black shareholders;
- Creation of 51% black-owned businesses to procure from untransformed manufacturers for the sole purpose of on-selling to companies that then deal with the public sector. Provided that the turnover of the newly created 51% black-owned business remains below R50 million, this structure will improve the procurement score of the business that deals with the public sector, thus positioning it to benefit significantly from B-BBEE without substantively complying with the spirit and the letter of B-BBBEE; and
- Implementing broad-based ownership schemes (BBOS), the terms of which are not negotiated at arms length, and/or where the economic benefits associated with such ownership do not flow to the BBOS beneficiaries.
Role of B-BBEE Commission regarding B-BBEE fronting
A recurring theme during the fronting conference was the view that B-BBEE is replete with fronting practices. Some instances of fronting may be accidental due to lack of knowledge. In these instances, it is imperative that companies become better informed in order to eradicate these practices. The B-BBEE Commission has also been mandated to investigate (both on its own initiative and also on receipt of a complaint) and to make a finding as to whether any B-BBEE initiative involves a fronting practice. In the event that the B-BBEE Commission finds that a criminal offence has been committed in terms of the Act or any other law, it must refer the matter to the National Prosecuting Authority for further action.
The B-BBEE Commission may at times be required to wield a big stick to enforce the correct application of the Act. However, it will also be required to collaborate with companies and B-BBEE practitioners to create a robust B-BBEE framework that will underpin the economic transformation of South Africa. The functions of the B-BBEE Commission include:
- Promoting public awareness of the provisions of the Act;
- Providing guidance on the interpretation of the provisions of the Act or applying to the courts for a declaratory order on the interpretation or application of the provisions of the Act; and
- Fostering collaboration between the public and private sector to promote and safeguard the objectives of B-BBEE.
We at Transcend Capital welcome the establishment of the B-BBEE Commission and believe that it plays an important role in establishing best practice and promoting the objectives of B-BBEE, particularly in creating certainty where there are conflicting opinions on provisions in the B-BBEE legislative framework.
Transcend Capital has historically worked collaboratively with its clients, the dti and verification agencies, in order to implement B-BBEE initiatives that embody the spirit of B-BBEE. In light of recent events in South Africa, structuring B-BBEE transactions and initiatives that promote the objectives of B-BBEE and that will drive the realisation of equality as envisaged in our Constitution, has never been more urgent. We look forward to continuing to work with our clients, the dti and other stakeholders to implement B-BBEE initiatives that build an inclusive, competitive and vibrant economy.