Understanding BEE

BBBEE Fronting

BEE fronting is a tactic to bypass the B-BBEE Act and the Codes while claiming you adhere to them. Being found guilty of BEE fronting can result in fines, imprisonment, and reputational damage.

B-BBEE or Broad-Based Black Economic Empowerment, when done effectively, is a potent tool for economic transformation, but BEE fronting presents a threat by undermining the authority and legitimacy of BEE criteria.

In 2018, the state pushed to address BEE fronting through the Employment Equity Amendment Bill . Being found guilty of BEE fronting can result in fines, imprisonment, and reputational damage that could affect business in South Africa.

This resource details everything about BEE fronting, from what it is, long-term implications and what to do about it.

What is Fronting?

The BEE fronting definition according to the Department of Trade, Industry and Competition (DTIC) states that fronting is a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes. In other words, B-B BEE fronting means intentionally bypassing BEE legislation while claiming that you adhere to it for the benefit of your business. It is considered fraud and claiming ignorance is no longer a viable excuse in the eyes of the law.

Anyone who knowingly engages in fronting or who knows about an instance of fronting and does not report it is liable to penalties. The BEE Act even stipulates that people and parties who ought to have known about an instance of fronting are obliged to investigate and be accountable to the law for negligence.

The long-term impact of fronting affects guilty businesses, their shareholders and employees and the economic progress that effective BEE offers. Businesses or people guilty of fronting may be liable to extensive fines and prison time that could irrevocably hinder business growth and taint its reputation.

What is Fronting? — original illustration

BEE Fronting Examples

BEE fronting can happen in several ways. These are the most common methods of BEE fronting and relevant examples.

Window Dressing

An example of window dressing in BEE fronting is where a Black individual is given a company title (such as director or shareholder) but does not get the powers associated with it. While they may have the title, they are prevented or discouraged from performing the role and participating in business activities and decisions accordingly. Window dressing is the misrepresentation of a person’s importance in the company in order to gain BEE benefits like preferential procurement.

Specific examples of window dressing include:

Claiming lower-paid Black employees hold senior positions
Paying executive Black employees a significantly lower salary than other executives
Listing Black employees as executives or top management without their knowledge or agreement
Excluding Black executives from top-level business decision-making

Diverting Benefits

Benefit diversion in BEE fronting is when a South African enterprise runs initiatives in which the economic benefits received from the enterprise’s B-BBEE status do not reach the Black people in the enterprise, in the ratio specified in the relevant legal documentation.

Specific examples of benefit diversion include:

Having a 51% Black shareholder, and using a Level 2 affidavit because of this, but the shareholder is unaware of why they are not getting dividends, does not attend shareholders meetings and is oblivious as to what the Annual Financial Statements (AFS) look like.
Trying to make an NPO or NPC a 51% shareholder to meet Black ownership requirements. A non-profit does not have shareholders and therefore cannot have ownership. For this to be B-BBEE compliant, the NPC/NPO needs to operate as a BBOS or ESOP meaning the trustees need to be 50% Black, independent and 85% of the proceeds need to go to Black beneficiaries.
Forming a new company which is 51% owned by Black shareholders and 49% owned by the original company, which supplies all the cost of sales with a very low gross profit to the new company. As a result, the company runs at a small loss every year, and there is no dividend and no proof of benefit to the Black shareholders. Ownership means you have a percentage share of any profits paid by a company and in this case, there is no profit.

Opportunistic intermediaries

Opportunistic intermediaries are companies that make deals with businesses that have good B-BBEE status for their own benefit.

Specific examples of opportunistic intermediaries include agreements that:

Restrict the identity of the intermediary’s customers, service providers or suppliers
Have terms and conditions that are glossed over or not negotiated in a fair manner
Maintain business relationships in unrelated and improbable contexts

BEE Fronting Penalties

Section 130(3)(a) of the Amendment Act criminalised BEE fronting. It stipulates the following BEE fronting penalties:

An individual who knowingly engages in BEE fronting is liable to a fine and/or 10 years imprisonment.
Companies may face fines of up to 10% of their annual turnover.
If a B-BBEE verification professional, procurement officer, or public servant is aware of fronting or attempts to commit BEE fronting, they may be fined or imprisoned for up to 12 months.

Anyone convicted of fronting is prohibited from doing business with the government and organs of state for up to 10 years, according to section 13P of the Amendment Act, although courts are given the discretion to limit this to only the individuals involved in fronting as opposed to their entire organisation. This stipulation in the act ensures that those found guilty of BEE fronting risk losing access to markets and, therefore, their future revenue.

Companies and individuals can face litigation or be sued for recovery of money made through fronting. Apart from the legal consequences of BEE fronting, the reputational damage associated with it is another deterrent.

Ultimately, businesses aiming for B-BBEE compliance must do so while adhering to the B-BBEE Amendment Act, which includes not taking part in BEE fronting. Working with a reputable BEE verification agency is recommended to ensure that BEE compliance is achieved optimally and lawfully.

BEE Fronting Penalties — original illustration

How to Report BEE Fronting

Everyone has an obligation to report fronting if they notice any fronting indicators, so knowing how and where to report BEE fronting is essential. The first step is notifying the B-BBEE Commission unit in writing. It will then consider what has been reported and initiate an investigation if it sees fit. If the B-BBEE commission finds it necessary, it will refer the issue to the National Prosecuting Authority (NPA) for prosecution. After that, if the entity is found to be engaging in BEE fronting, its B-BBEE scorecard may be suspended until corrective action is taken, and its details will be kept in the DTIC’s database.

Ultimately the B-BBEE Act and the Codes are in place to legally reinforce economic transformation and BEE fronting is a tactic people and businesses use to get around it illegally. It is a criminal offence and a form of fraud, and legislation views it as such, with guilty parties being liable to fines and imprisonment. Using a trustworthy BEE verification professional or organisation is recommended to avoid BEE fronting practices and all the legal and business-related ramifications.