What is “fronting”?
Fronting is described as a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of B-BBEE Act or the implementation of any of the provisions of B-BBEE Act, including but not limited to practices in connection with a B-BBEE initative:
(a) in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;
(b) in terms of which the economic benefits received as a result of the broad based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;
(c) involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or
(d) involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which:
(i) there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;
(ii) the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
(iii) the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.
Some examples of B-BBEE fronting in practice:
Where a company claims that lower-salaried black employees, such as garden workers or drivers, are actually directors or hold different senior positions in order to secure business contracts.
Suspicious activity includes the listing of black employees as executives or shareholders without the employee’s knowledge or agreement.
Positioning black employees as executives but with a significant lower salary compared to other executives.
A lack of active participation by alleged black managers in top-level decision-making processes, etc.
Of possible interest to the reader is a 2017 High Court case involving the Passenger Rail Agency of South Africa (PRASA) and Swifambo Rail Agency Proprietary Limited.
The PRASA/ Swifambo case related to the award of a tender to Swifambo by PRASA for the supply of locomotives to PRASA. The locomotives would be sourced by Swifambo from Vossloh, a company based in Spain. The Court decided to review and set aside PRASA’s decision to award the contract to Swifambo.
The Court found that the arrangement between Swifambo and Vossloh constituted to a fronting practice on the basis that:
- Swifambo was merely a “token participant” which had received monetary compensation in exchange for the use of its B-BBEE rating by Vossloh;
- Vossloh maintained completed control of the operations of the business(including the appointment of members of the steering committee) and Swifambo’s role was limited to minor administrative activities.
- There was no transfer of skills to Swifambo;
- Vossloh had chosen not to take advantage of the “equity equivalent” programme whereby multinational firms may earn B-BBEE ownership points by contributing to an approved programme instead of having a B-BBEE shareholder. Vossloh had instead used Swifambo as a vehicle to tender for the locomotive contract even though Swifambo had no resources or technical capabilities, operational capacity, staff or other resources and its business operations were accordingly improbable.
- It was effectively a shelf company; the true nature of the relationship between Swifambo and Vossloh was that Swifambo was a front for Vossloh and had effectively subcontracted 100% of the work required under the PRASA contract to Vossloh.
NOTE: The Court also found that the definition of fronting practice does not require a misrepresentation to the relevant State body of the true nature of the arrangement between the fronting parties. This is important as before 2013, fronting practices were covered by the common law criminal offence of fraud which requires a misrepresentation in order for a person to be convicted. The Court’s finding makes it easier for a fronting practice as defined in the B-BBEE Act to be prosecuted.
The Court also found that a fronting practice did not require the exploitation of a black person. The fact that there was a financial benefit to Swifambo from the arrangement was accordingly not a defence. The relationship between Swifambo and Vossloh however amounted to the exploitation of the intended beneficiaries of the B-BBEE Act, namely black people.
The case highlights the importance of ensuring that State and Parastatal tenders are structured in a way which complies with the B-BBEE requirements of the tender and does not amount to a fronting practice. The Preferential Procurement Regulations under the Preferential Procurement Policy Framework Act provide guidance on the tender process including with regard to subcontracting arrangements. In terms of the Regulations, a successful tenderer may not subcontract more than 25% of the value of the contract to a firm which does not have an equal or higher B-BBEE status level unless the subcontract is to an exempt micro enterprise (a firm with less than R10 million annual revenue) which has the ability to execute the subcontract.
The successful tenderer also requires the approval of the relevant organ of State for any subcontracting arrangement entered into after the award of a tender.
Penalties and consequences
Criminal liability may ensue if a party is found guilty of fronting and, as per Section 130(3)(a) of the Amendment Act, an individual who knowingly engages in a fronting practice will be liable to a fine and/or imprisonment for a period not exceeding 10 (ten) years. Companies can face administrative penalties of up to 10% of its annual turnover. A B-BBEE verification professional, who is an individual in charge of rating the status of a company in terms of their B-BBEE compliance, who becomes aware, or attempts to commit, fronting is liable to a fine and/or imprisonment for a period not exceeding 12 (twelve) months.
Section 13P of the Amendment Act prohibits any person that has been convicted of an offence in terms of the Act from doing business with organs of state for up to 10 (ten) years. Courts are given the discretion to limit this prohibition to only those persons involved in the fronting practice, instead of the whole company concerned, to avoid those individuals from trying to front again, but through another entity, in an attempt to secure government work or tenders.
In addition, the B-BBEE Commission has mentioned how a conviction can come with reputational damage as a company or individual can be sued and taken to court for the recovery of a payment made on the back of fronting.
Resultantly, fronting fraud is a serious crime which can hamper your access to government work and lead to fines, imprisonment and reputational damage.
Who can be found guilty of fronting?
There are essentially two categories of fronting offenders; those who actively front and those who were a part of a fronting scheme and should have reported it. The Amendment Act creates the offence for anyone who “knowingly engages” in fronting, and defines “knowingly” as a person who has actual knowledge of the fronting or who is in a position where he or she ought to have knowledge of it and should have investigated the matter or taken measures which would have exposed the fronting. The Amendment Act covers those individuals who are negligent in their actions, not just intentional, and one has to take reasonable steps to try and ascertain the actual state of affairs if they are in that position.
Ignorance of the facts is not an excuse under the Amendment Act and alleging that you “didn’t know what was going on” will unlikely help you to escape a charge, especially if there were indicators of fronting that you should have been aware of.
The B-BBEE Commission was established in 2016 and has jurisdiction throughout South Africa to oversee the implementation and application of the Amendment Act. The B-BBEE Commission does not have the authority to impose a penalty or other criminal sanctions as this is strictly dealt with through a court of law. It can, however, make a finding as to whether any B-BBEE practice involves fronting and has wide investigative powers afforded to it. Section 13K of the Amendment Act gives the Commission power to issue summons to any person or gain possession of any piece of evidence.
After an employee or the general public lay a complaint to the B-BBEE Commission about a potential fronting practice, the Commission will investigate the matter and may then refer same to the National Prosecuting Authority (“NPA”) for prosecution, to the South African Police Service (“SAPS”) for criminal investigation or even to the South African Revenue Services (“SARS”) for examination.
A person who appears before the Commission is not obliged to give any information over which is self-incriminating and, if they do, this information will not be admissible before a criminal court.
In closing, businesses seeking to achieve B-BBEE compliance must ensure compliance with the B-BBEE Amendment Act and do so in a manner which does not amount to fronting.
Author Craig Tonkin