DO YOU KNOW WHAT B-BBEE FRONTING MEANS?

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. Verification agencies, and /or procurement officers and relevant decision-makers may come across fronting indicators through their interactions with measured entities.


Fronting Practices


Window-dressing: This includes cases in which black people are appointed or introduced to an enterprise based on tokenism and may be:

  • Discouraged or inhibited from substantially participating in the core activities of an enterprise; and

  • Discouraged or inhibited from substantially participating in the stated areas and/or levels of their participation.

Benefit Diversion: This includes initiatives implemented where the economic benefits received because of the B-BBEE Status of an enterprise do not flow to black people in the ratio as specified in the relevant legal documentation.

Opportunistic Intermediaries: This includes enterprises that have concluded agreements with other enterprises with a view to leveraging the opportunistic intermediary's favorable B-BBEE status in circumstances where the agreement involves:

  • Significant limitations or restrictions upon the identity of the opportunistic intermediary's suppliers, service providers, clients, or customers.

  • The maintenance of their business operations in a context reasonably considered improbable having regard to resources; and

  • Terms and conditions that are not negotiated at arms-length on a fair and reasonable basis.

Responsibility to Report Fronting


In order to effectively deal with the scourge of Fronting, verification agencies, and/or procurement officers and relevant decision makers are encouraged to obtain a signed declaration from the clients or entities that they verify or provide business opportunities to, which states that the client or entity understands and accepts that the verification agency, procurement officer or relevant decision maker may report Fronting practices to the DTI. Intentional misrepresentation by measured entities may constitute fraudulent practices, public officials and verification agencies are to report such cases to the DTI.


Fronting Indicators

  • The black people identified by an enterprise as its shareholders, executives or management are unaware or uncertain of their role within an enterprise;

  • The black people identified by an enterprise as its shareholders, executives or management have roles of responsibility that differ significantly from those of their non-black peers;

  • The black people who serve in executive or management positions in an enterprise are paid significantly lower than the market norm, unless all executives or management of an enterprise are paid at a similar level;

  • There is no significant indication of active participation by black people identified as top management at strategic decision-making level;

  • An enterprise only conducts peripheral functions and does not perform the core functions reasonably expected of other, similar, enterprises;

  • An enterprise relies on a third-party to conduct most core functions normally conducted by enterprises like it;

  • An enterprise cannot operate independently without a third-party, because of contractual obligations or the lack of technical or operational competence;

  • The enterprise displays evidence of circumvention or attempted circumvention;

  • An enterprise buys goods or services at a significantly different rate than the market from a related person or shareholder;

  • An enterprise obtains loans, not linked to the good faith share purchases or enterprise development initiatives, from a related person at an excessive rate; and

  • An enterprise shares all premises and infrastructure with a related person, or with a shareholder with no B-BBEE status or a third-party operating in the same industry where the cost of such premises and infrastructure is disproportionate to market-related costs.

Procedure for reporting of Fronting:


Contact- The B-BBEE AC Secretariat:

The DTI has established the Secretariat which is made up of the members of staff in the B-BBEE Unit from the DTI, namely.

Ms. Nomonde Mesatywa - Chief Director Mr. Takalani Tambani - Director Ms. Lindiwe Madonsela - Deputy Director

The Secretariat is accountable to the Minister of Trade and Industry the DTI Campus Ground Floor, Block B 77 Meintjies Street Sunnyside Pretoria 0001 Tel: (+27) 12 394 1941 Fax: (+27) 12 394 2941 E-mail: BBBEEAC@theDTI.gov.za


The following diagram depicts the procedure for reporting Fronting practices:

The Department of Trade and Industry (DTI), in cooperation with the Department of Labour, is currently progressing an amendment to the existing broad-based black economic empowerment(BBBEE) legislation, which could see the criminalization of private-sector BBBEE fronting and the possible imprisonment of executive managers found to be complicit.


The amendment, which was currently before Parliament, proposed a maximum penalty of ten years’ imprisonment, and/ or a fine for individual private sector executives found guilty of the misrepresentation of corporate BEE points, or a penalty of 10% of total yearly turnover for companies found guilty of fronting.

A maximum penalty of one year’s imprisonment, or a fine, would be imposed on those who failed to report fronting.


DTI BEE chief director Nomonde Mesatywa said the amendment was aimed at pursuing organizations guilty of misrepresenting their empowerment status or who knowingly participate in other schemes seeking to defeat the objectives of transformation.

“BEE has been demonized in the private sector, which is currently not toe-ing the line when it comes to transformation.


Once you start to pierce the corporate veil, very few companies that advertise BEE Level 1 accreditation, practice real transformation,” she said.

Her comments came as the Commission for Employment Equity (CEE) released its yearly report, which reflected on the national status of employment equity and the progress made in increasing the representation of designated groups in the workplace.


The report stated that in 10 years the percentage of blacks employed at top management level had increased by a marginal 2.3% – from 10% in 2002 to 12.3% in 2012.

While white representation decreased by 8.9% from 81.5% in 2002 to 72.6% in 2012, this racial group retained a more than two-thirds majority in terms of representation at this level.

The report further showed that a higher percentage of blacks were employed in lower management levels.


Mesatywa said the report substantiated concerns that the private sector had not effected true transformation, which was most evident in the lack of upward migration by black professionals.


“What we need are black shareholders that are not simply silent partners, but who actively participate in the running of companies. If this does not happen, we will never realize broad skills development or the rise of black professionals,” she emphasized.

Labour Minister, Mildred Oliphant, attended the CEE report launch and said: “Certain companies feel as though they are not obliged to comply with BEE legislation, despite it being a legal requirement.


While we would rather not implement penalties, we do not want this country to depreciate into a ‘free-for-all.’


Oliphant further alluded to the possibility that, in future, government might not issue compliance certificates to companies that failed to practice “true” empowerment, which would preclude them from applying for government tenders, or participating in any State sanctioned work.

Oliphant said the department hoped the amendment would be approved by Parliament by the end of the year, after which it would be promptly implemented.


What is Fronting?

“FRONTING” is when a business pretends to meet BEE requirements to get tenders or be recognized as a BEE supplier at a specific BEE level. It can take many forms such as placing black employees in positions which make them seem compliant, such as claiming that a cleaner fills a management position.


If I can be of any further assistance, please feel free to ask.


Sincerely

Hilton Johnson

CEO

Compliance Hub Consulting (Pty) Ltd

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