2024 update
Back in August 2020, an article was published on beeratings.com discussing BEE Fronting, current practices, and legal outcomes from court cases. This article refreshes the aspects of BEE fronting, coupled with recent statistics from the BEE Commission for 2023/2024.
Fronting only became illegal in October 2014. BEE was introduced in 2003, and there was no legal fronting in the first decade.
The B-BBEE Act was amended in 2013:
✓ to strengthen it and ensure effective, consistent implementation and reporting across the economy.
✓ to align with broader economic policy on creating employment and reducing poverty and inequality.
✓ with the advice of the Presidential BEE Advisory Council.
The following were the main amendments:
✓ Deal with non-compliance and circumvention, including making ‘fronting’ an offense.
✓ Align the Act and Code of Good Practice with other legislation impacting B-BBEE.
✓ Oblige reporting on compliance by JSE-listed entities and state organs and public entities (re: criteria for procurement, licensing, concessions, incentives, etc.)
✓ Establish a B-BBEE Commission to monitor and evaluate B-BBEE.
Functions of the BEE Commission as per Section 13F of the Act
- Monitor, supervise, and promote adherence in the interest of the public.
- Strengthen collaboration of private & public sectors to safeguard the Act’s objectives.
- Receive complaints or initiate investigations.
- Promote advocacy, access to opportunities, and educational programmes.
- Maintain a register of major B-BBEE transactions (>R25 million).
- Receive and analyse prescribed reports (JSE listed entities, SETA, Public Entities, Organs of State).
- Promote good corporate governance and accountability.
- Increase knowledge and public awareness (guidelines, research, communication).
The BEE Commission employs 29 persons (as of mid-2024) and part of their operational mandate is to produce meaningful reports for use by the government and the public. One such report is the Annual Performance Plan (APP) which sets out activities, outputs, and outcomes that the Commission seeks to achieve with specified timeframes and available resources.
The Commission’s APP report is aligned with the government and the dtic’s overarching priorities, in particular on Transformation and promoting the participation of black people in the economy, through compliance with the B-BBEE Act and initiatives on enterprise, supplier, skills, and socio-economic development.
Of particular interest in this AP Report is a statistic for fronting:
❑ Received 92 Complaints, 92% of which related to ‘fronting’ and misrepresentation.
❑ Finalised 67 investigation reports within 12 months. 8 matters were resolved by Alternative Dispute Resolution, where R3 050 000 was paid to prejudiced parties and R100 000 to NSFAS.
The concern is that approximately 90 complaints were for fronting practices in the last 12 months. It has been 10 years since fronting became illegal in October 2014 yet many persons and businesses still seem intent on using illegal practices to obtain their desired BEE-compliance status. This serves no good to anyone at all including the employees of these businesses as they are also negatively affected by such foolish practices and may soon be out of work if the company is found guilty in a court of law.
Previously, it was reported that 484 complaints were received up to the end of 2018, and of these three had been referred to criminal prosecution and two to court.
DEFINITION OF FRONTING AND FRONTING PRACTICES IN TERMS OF THE B-BBEE ACT.
“Fronting” means a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes of Good Practice that came into effect on the 1st of May 2015 (the Codes). Fronting commonly involves the reliance on data or claims of compliance with the B-BBEE Act based on misrepresentation of facts, made by the party claiming compliance or by any other natural or juristic person.
“Fronting practices” include the following:
Window dressing: This includes cases wherein black people are appointed or introduced to an enterprise based on tokenism and may be:
• Appointed to an enterprise, but are discouraged and/or inhibited from substantially participating in the core business and activities of the enterprise.
• Appointed to an enterprise, but are discouraged and/or inhibited from substantially participating in the stated areas and/or levels of their participation.
• Appointed to an enterprise with the sole mandate to assist the entity in circumventing the B-BBEE Act and no intention to participate in its core business and activities.
Benefit Diversion:
• The economic benefits received by an enterprise as a result of its B-BBEE status owing to the black shareholding, do not flow to black people in the ratio stipulated in the relevant legal documents.
Opportunistic intermediaries: This involves the conclusion of a legal relationship where the agreement is with:
• A black person in order to achieve a level of B-BBEE that is compliant with the Codes of Good Practice without the economic benefits that would be expected to flow from that status being afforded to the black person.
• With other enterprises, in order to achieve a B-BBEE status in certain defined circumstances.
FRONTING INDICATORS
The following is a non-exhaustive list of fronting indicators that can assist in identifying fronting practices:
• The black people identified by an enterprise as its shareholders, in top and middle management are unaware or uncertain of their role within an enterprise;
• The black people identified by an enterprise as its shareholders, in top and middle management have roles of responsibility that differ significantly from those of their non-black peers;
• The black people who serve as top or middle management are paid significantly lower than the market norm, whereas their non-black peers earn what the market norm prescribes or more;
• There is no significant indication of active participation by black people appointed as top management at the strategic decision-making level;
• An enterprise only conducts minimal or insignificant functions and does not perform the core functions that are reasonably expected of other, similar, enterprises;
• An enterprise relies on a third party to conduct most core functions normally conducted by enterprises similar to it; and is also dependent on the third party for operations to fulfill contractual obligations such as technical or operational duties; and
• An enterprise buys goods or services at a significantly higher rate than the market prescribes from a related person or shareholder.
PENALTIES AND PROHIBITIONS
A natural or juristic person convicted of fronting practice(s) in terms of the B-BBEE Act may be liable to a fine of up to 10% annual turnover or a maximum imprisonment of ten (10) years. Further, any natural or juristic person convicted of an offense in terms of the B-BBEE Act may not for 10 years from the date of conviction, conduct business with any organ of the state or public entity and will be registered in a register of the tender defaulters with the National Treasury.
Enterprises are encouraged to comply with the B-BBEE Act and desist from knowingly engaging or participating in conduct that would result in undermining the legislation or making use of black people as mere tokens instead of meaningful contributors towards economic growth.
In terms of Section 13P of the Act, once convicted the guilty party also cannot for the next ten years deal with the government and organs of the state. Given that such contracts were presumably the motivation for the fronting, this could be the worst punishment for many businesses (and could be 100% of turnover for the next decade). The section goes on to provide for all shareholders and directors of a company convicted of fronting (even if they were not) to be restricted similarly.
Only a court can convict someone of fronting and only after a formal complaint has been raised with the BEE Commission for investigation followed by a decision, if relevant, to refer the matter to the NPA for prosecution.
The NPA must assess whether it agrees with the B-BBEE Commission and decide whether it believes that it can successfully prosecute. The B-BBEE Commission does not have the power to convict anyone of fronting.
Section 13K gives the BEE Commission powers to summon witnesses and request evidence. Businesses and the public must cooperate with the Commission; if not they will incriminate themselves, and if they do and it is self-incriminatory the evidence is not admissible in the criminal court case. The B-BBEE Commission can make a finding of whether fronting has occurred (section 13J(3) but this is not a criminal conviction.
The B-BBEE Commission can also refer the matter to the NPA or SAPS (s13J(4) and (5)) or SARS (s13J(6).
