Many entities become demotivated when it comes to B-BBEE because they do not have any black ownership or the required black ownership percentage.
However, most entities have become creative with ways to achieve ownership points in their entities, but beware that most of these “creative” ideas are indeed fronting, as per the definition in the B-BBEE Act.
The business owners, unfortunately, are not aware of the legal consequences of their creativity.
- What is Fronting?
The B-BBEE Act defines fronting as “any act that undermines or frustrates the objectives of the Act or its implementation.”
- Examples of Fronting:
- Window dressing – A black person is given a title, such as director or shareholder, but does not get the powers associated with it;
- Benefit Diversion – Where the black people do not receive the benefits as stated in the relevant legal documentation regarding the economic benefits received as a result of the B-BBEE status of the enterprise;
- Opportunistic Intermediaries – This includes enterprises that have concluded agreements with the other enterprises to leverage the opportunistic intermediary’s favourable B-BBEE status in circumstances where the agreement involves:
- Significant limitations or restrictions upon the identity of the opportunistic intermediary’s suppliers, services providers, clients, or customers;
- Maintenance of their business operations in a context reasonably considered improbable having regard to resources;
- Terms and conditions that are not negotiated at arms-length on a fair and reasonable basis.
- Consequences of Fronting:
- Individuals involved in fronting may be imprisoned for up to ten years, and there is no limit to the fine. Individuals can be sentenced to both imprisonment and a fine;
- Entities involved in fronting can be fined up to 10% of their annual turnover;
- Verification agents, procurement officers, and public servants who are aware of any fronting or attempted fronting, but fail to report the fronting can receive a prison sentence of up to one year, and there is no limit to the fine. These individuals can be sentenced to both imprisonment and a fine;
- The B-BBEE Act also provides that once convicted, the guilty party also cannot deal with the government and organs of state for the next ten years.
Conclusion:
To be guilty of
fronting, one has to knowingly engage in fronting. The Act has defined
“knowingly” as:
‘knowing’, ‘knowingly’ or ‘knows’, when used with respect to a person, and in relation to a particular matter, means that the person either-
- had actual knowledge of that matter; or
- was in a position in which the person reasonably
ought to have
- had actual knowledge;
- investigated the matter to an extent that would have provided the person with actual knowledge; or
- taken other measures which, if taken, would reasonably be expected to have provided the person with actual knowledge of the matter.’’
Therefore, the easy way out is not always the safest and most legal way out as the consequences may be worse than a level nine (non-compliant) status.
Contact your SEESA BEE Advisor to assist your business with any BEE-related queries you might have alternatively, SMS the word “SEESA” to 45776 for an expert legal advisor to contact you.
Resources:
B-BBEE Amendment Act 2013
About
the author:
Kapano Moloto started her career at SEESA in 2016 and is currently a BEE and Labour Legal Advisor at SEESA’s Polokwane Office. She is a LLB graduate