Fronting, a practice which presents black people as directors, shareholders or beneficiaries to boost an entity’s broad-based black economic empowerment (B-BBEE) status, has been a thorn in the side of the transformation agenda.
The commission started its work in June 2016 and by the end of September it had racked up 134 complaints, 84 per cent of which involved alleged fronting. Most of the accusations came from the transport, mining and construction sectors.
Ajay Lalu, the managing director of Black Lite Consulting, a leading B-BBEE and sustainability practice, says that fronting has been part of the landscape for a long time. However, he points out that despite the establishment of a dedicated watchdog in the BEE Commission, fronting persists.
He mentions that this is because companies believe they can get away with transgressions due to a low prosecution rate. He further points out that until we start to see ramifications similar to those meted out by the Competition Commission of South Africa (CCSA) the perception that fronting can go unpunished will persist.
Black Management Forum (BMF) Deputy President, Dumisani Mpafa shares this view and points out that while the Competition Commission appears committed, the public is yet to be privy to the outcomes of cases.
In order to gain the confidence of the public, he believes the Commission should be more transparent about the investigations it is undertaking, and even if outcomes have not been concluded, update the public on the cases they are looking into. He adds: “If we are to believe that fronting is a punishable offence, there needs to be clear ramifications, including the naming and shaming of offenders.”
Lalu points out that as companies compete to keep generating profits, the practice has become more complex. Offenders are devising increasingly imaginative ways of cheating the system. “We are seeing more innovative ways of hiding, which appears not just in ownership scores, but also by seeking to secure more preferential procurement points which favour BEE-compliant businesses for government tenders and contracts. Some of these companies engage in fraudulent acts, such as falsifying documents,” says Lalu.
Although the real decision-making is often under the control of the white individuals in the transaction, Lalu makes the distinction of the role of parties within a fronting relationship.
He points out that black companies or individuals who don’t have full knowledge of what is going on and perhaps have simply been told that they are shareholders and to expect dividends, could be categorised as being complacent. Often this group of participants sign papers and don’t know what the implications are.
Complacency, for instance, is when people sign up for something and don’t educate themselves about their obligations, gains etc. and enter into an agreement with full knowledge that it is fronting. In these cases the burden of punishment between the two parties is often not the same, unless it’s proven that the black party is knowingly complicit.
While the previous B-BBEE codes were voluntary in nature, the new framework introduces penalties and even jail time for non-compliance and fronting practices.
The Commission has been on a drive to educate the public on black economic empowerment and what its compliance requirements are. By Lalu’s assessment, the success of the BEE Commission thus far has been fair, given the constraints they face; he points out however, that the Commission faces the challenge of meeting its mandate with limited resources and capacity.
“Compared to agencies such as SARS which has the resources to draw on skills within the organisation and bring in expertise from outside, this commission’s capacity gap is wide.” He thinks that because the country is faced with a multitude of pressing public expenditure priorities, it is not likely that there will be a massive injection of resources into the commission.
Mpafa believes this lack of resources emboldens corporates to circumvent the rules. “Those companies that engage in fronting rely on the weakness of government agencies’ capacity to undertake thorough monitoring and follow through with enforcement. Until the BEE Commission demonstrates its capacity to act against offenders, some businesses will continue to engage in fronting.” Mpafa also warns of the potential of the Commission to get bogged down by such a high volume of simpler cases of fronting, that it is not able to address the more sophisticated cases.
Some entities have complex structures involving holding companies, subsidiaries and joint ventures, which due to these intricacies are harder to apprehend.
Companies found guilty of fronting could face fines of up to 10 per cent of their annual turnover. Shareholders could also be held liable to a fine in their private capacity and could also serve jail sentences of up to ten years. Companies found guilty of fronting may not be able to conduct business with any government entities for a period of 10 years.
In response, companies will need to rigorously reassess their value chains and rapidly address areas that may no longer meet the new requirements. Mpafa says that the penalities are adequate, but unless they are applied, they will just be meaningless. He emphasises that the business community needs to see evidence that misrepresenting a business as black-owned and managed in order to secure contracts, is unlawful. He also points out that verification agencies are an important link in the chain, yet they remain untransformed.
BEE Acting Commissioner Zodwa Ntuli has indicated that the Commission is trying to establish whether there is collusion between companies and verification agencies, or whether these agencies are simply just extremely disorganised. In these cases, there seem to be indications that some empowerment verification agencies are raising some companies’ B-BBEE status levels without them meeting the necessary requirements. Mpafa says that the role of these agencies needs to be established more urgently, as they should act as an enabler.
According to Lalu, going forward a more proactive approach needs to be adopted. “The issue needs to be addressed more urgently. Companies need to be more proactive and have clear fronting policies and procedures for actions to be taken in the event of a complaint.”
The consequences of being found guilty of fronting are grave and can result in blacklisting, employees losing their jobs, reputational damage, massive financial consequences and the inability to do business with government. He further warns that, “companies should be more proactive in addressing the issue with policies and internal awareness drives. The issue is not limited to the private sector, public sector entities also need to address fronting. The last thing you want is for the BEE Commissioner to find you guilty.”
Mpafa would like to see the BEE Commission reach out and work more closely with organisations such as the BMF that have an interest in seeing transformation move at a much faster pace. According to the regulations for handling complaints, issued by Minister of Trade and Industry, Rob Davies in June 2016, once the BEE Commission’s investigations are completed, the findings or recommendations will be published and featured on its website and in the Government Gazette. Let’s watch that space closely.