What constitutes B-BBEE fronting? It refers to the misrepresentation of a company’s B-BBEE status. It involves misleading the users of the B-BBEE certificate by stating that the business is more transformed than it actually is. Even though B-BBEE participation remains a voluntary process, the act of fronting has now been criminalised in the amended B-BBEE Act of 2013. The Act defines a ‘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 or the implementation of any of the provisions of this Act’.
The definition provides a non-exhaustive list of broad examples of what would constitute fronting such as appointing a black person as a director but who has no real executive decision-making powers, dividends that do not flow in relation to shareholding, setting up a legal entity where the maintenance of business operations is reasonably considered to be improbable having regard to the resources available and where the terms and conditions are not negotiated at arm’s length and on a fair and reasonable basis.
The above will be relatively easy to investigate by the soon to be appointed B-BBEE Commissioner. What will be the penalty if found guilty?
The Act states that ‘in the case of a contravention of subsection (1), a fine or imprisonment for a period not exceeding 10 years or both a fine and such imprisonment or, if the convicted person is not a natural person, a fine not exceeding 10 per cent of its annual turnover’.
Following is a specific scenario to be careful of.
Companies are wrongly advised that they can set up legal entities within their ownership structure that are 51% black-owned in an endeavour to apply the modified flow-through principle to obtain an automatic Level 2 status. The amended codes now clearly state that the modified flow-through principle may only be applied once in the entire ownership structure in determining a measured entity’s score on two of the indicators on the Equity Ownership scorecard and not to determine the overall B-BBEE status level. The 51% black-owned entity has an automatic Level 2 status, but not the entity in which it is a shareholder.
Let’s all stay clear of this newly defined form of fraud.
Author: Anton de Wet CA(SA) is a Partner at Middel & Partners
