There has been a lot of recent publicity around BEE fronting and the B-BBEE Commission devoted much of its recent annual conference on BEE ownership to this very important topic. Fronting and BEE ownership can easily overlap.
At the 2019 B-BBEE Ownership conference the Minister of Trade and Industry (under whose ministry the B-BBEE Commission falls) categorically stated that fronting is hampering economic transformation.
However, some issues are often overlooked and so in this article we seek to clarify some of the issues around fronting.
What is “BEE fronting”?
Fronting was not mentioned in the original BEE Act (2003), but it did not mean that people did not abuse the Act and put all sorts of structures in place which met the letter of the law but actually did nothing to further the objectives of the Act.
In response, a decade after the Act was passed a definition was included for what constitutes a “fronting practice”. In essence it was defined as “any act that undermines or frustrates the objectives of the Act or its implementation”. This can obviously be broad and can be open to interpretation.
The definition does list some examples, but this is not an exhaustive list. In other words, there are other forms of fronting, but the following are definitely fronting (in simpler English than in the Act. Please read section 1 of the B-BBEE Act for the proper definitions):
- Where a Black Person is given a title (such as director or shareholder) but does not get the powers associated with it;
- Where the economic flows from a BEE transaction differ between what the legal documents say and what actually happens;
- Where the contracts are not commercially reasonable. This could be because the contract has significant (and unfair) limitations, is not likely in reality or was not arm’s length on a fair and reasonable basis.
While the list is not exhaustive (and more examples exist), it is clear if one contracts or appoints fairly and then abides by the contract there is no clear-cut fronting, and some proof will be required that the objectives and implementation of the Act are knowingly being frustrated.
What are the consequences of fronting?
Just inserting a definition of fronting into the Act doesn’t really change how people behave. So, it’s important that all the other 2013 amendments also be considered.
The most significant were in section 13, which not only established the B-BBEE Commission but also criminalized certain contraventions of the Act, including fronting (section 13 O(1)(d)).
Anyone found guilty of fronting can be sent to prison and/or be fined. These penalties can be summarized as follows:
- For people involved in fronting: prison can be for up to ten years and there is no limit to the fine. People can be sentenced to both prison and a fine.
- For companies involved in fronting: the fine can be up to 10% of annual turnover (there cannot be any imprisonment).
- For verification agents, procurement officers and public servants who are aware of any fronting or attempted fronting who fail to report the fronting: prison can be for up to one year and there is no limit to the fine. These parties can also be sentenced to both prison and a fine.
Clearly these are very serious offences. To be clear, there are other offences in the BEE Act, which carry the same penalties. But this article will be confined to the offence of fronting.
Section 13P adds another consequence to a fronting conviction: once convicted the guilty party also cannot for the next ten years deal with government and organs of 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). This is theoretical, as such a company clearly would not be around after conviction.
The section goes on to provide for all shareholders and directors of a company convicted of fronting (even if they themselves were not) to be restricted in a similar way. This is so that they do not simply try and front again through another entity. Importantly, there is no time limit for such a restriction and individual shareholders and directors could find that they are banned from ever doing public sector work.
But, as the B-BBEE Commission points out, this is not all…a conviction also comes with significant reputational damage. For example, if payments have been made to a business on the back of BEE Scores that were wrongfully obtained because of fronting, litigation may be instituted to recover these amounts.
In other words, fronting carries some really serious penalties including reputational risk, fines, imprisonment and removal of access to markets (government spend).
Who can be guilty of fronting?
As can be seen from the above it is clear there are two types of fronting offenders: those who front and those who know of fronting and who should report it.
To be guilty of fronting one has to knowingly engage in fronting.
While this sounds like the normal requirement in criminal law that someone should have the intention to commit the crime, the BEE Act goes further to also cover those crimes that are as a result of negligence too.
This is because there was also a definition added in 2013 for “knowing” which covers more than actual knowledge of fronting. Those who actually know that they are engaged in fronting are liable to being charged, but so are those who ought to have known. In this latter category are people who ought to have investigated a matter to such an extent that they have actual knowledge and those who should have taken reasonable steps to have actual knowledge.
Let’s unpack what this means, using a common front arrangement: a black person signs up to be a shareholder in a business and gives it BEE points. However, that person is not really a shareholder because he signs contracts that leave the economic rights and votes in that company in effect unchanged. This is a typical sham transaction and the company would have engaged in fronting practice because it would have actual knowledge that nothing has changed (and in all likelihood not demonstrable audit/paper trail of records of participation in meetings, dividends, resolutions, etc).
But, just like with bribery and corruption, fronting practices have to always involve two or more parties. Simply put this boils down to a white party (which wants to get BEE credentials) and a black party (who gives those credentials) at least. So, the black party in this example has also engaged in a fronting practice.
However, he might escape criminal liability if he did not “know” he was fronting. If he conspires with the white party and knows full well that there is a front, he is equally guilty as the white party. But what if he genuinely did not know? Well, this is where the definition is important, and one would need to consider whether he should have investigated or taken steps to understand. The test is whether “reasonable” steps were taken to get the knowledge.
What is reasonable?
Consider whether it is reasonable for a black person to say he did not know he was fronting when he is well educated and experienced in commercial matters and has signed contracts with fronting in? Getting an attorney or accountant as a BEE partner therefore, for example, gives certain protection to a white party because the BEE partner has to think carefully before reporting fronting that he himself knows about and is involved in. Such partners should investigate or are reasonably expected to find out and whether they do or not is not relevant to whether they know or not that they are fronting.
But, if even the most uneducated BEE partner becomes aware of his involvement in a fronting practice and allows it to continue, he is fronting too!
It is important that all verification agents, officers and state officials understand that the B-BBEE Commission has effectively got them as its eyes and ears and if they become aware of any fronting or attempted fronting, they have to report it, in much the same way one has to report a car crash that one is involved in. Not reporting something like this is an offence for such people.
How does someone get convicted of fronting?
As with any crime only a court can convict someone of fronting.
For this to happen, someone would need to lay a complaint and the B-BBEE Commission would need to investigate the matter and decide to refer the matter to the NPA for prosecution.
The NPA would then need assess itself whether it agrees with the B-BBEE Commission and decide whether it believes that it can successfully prosecute. Then of course a judge would need to agree with the NPA and B-BBEE Commission that fronting has taken place (and if there is an appeal, maybe more judges would need to agree too). But, what is clear is that the B-BBEE Commission does not have the powers to convict anyone of fronting – that is handled through ‘normal’ legal challenges.
What’s very important however, is that the B-BBEE Commission does have significant powers to investigate fronting, and this can open up a can of worms for guilty parties.
Section 13K gives powers to summon witnesses and evidence, for example. People have to cooperate with the Commission, but they do not if it will incriminate themselves, and if they do and it is self-incriminatory the evidence is not admissible in the criminal court case. But, to be clear, the B-BBEE Commission can make a finding of whether fronting has occurred (section 13J(3) makes this crystal clear) but this is not a criminal conviction.
More likely, what happens here is that the BEE commission could refer you to court to enforce the terms of the ‘fronting’ agreement. For example – a black person (the gardener or the tea lady) is told they become the owner of 51% of the share in a company but never see a share certificate, dividend or board meeting (fronting 101) – the courts could enforce the agreement leaving the black person the legitimate owner of the shares, and the company no longer fronting…as we’ve said before – the risks are high.
The B-BBEE Commission can also refer the matter to the NPA or SAPS (s13J(4) and (5)) or (and here’s another real risk) SARS (s13J(6). So, to put it in another way, the B-BBEE Commission has access to significant information which they can share with parties with serious teeth.
How to report fronting:
Verification agencies and procurement officers have an obligation in terms of the Act to report fronting, but anyone can lay a complaint or report something suspect here: https://www.bbbeecommission.co.za/lodge-a-complaint-process/
What is the state of fronting?
A lot of fronting is alleged but before turning to the statistics around fronting it is important to contextualize fronting as follows:
Firstly, fronting only became illegal in October 2014. So, while BEE was introduced in 2003, for the first decade there was no fronting in a legal sense.
Secondly, even though in the first five years of fronting there have not been fronting convictions, it does not mean that fronting does not occur. This may be more a reflection of our law enforcement agencies or our court backlogs, which are not BEE issues.
Thirdly, one needs to consider whether like so many other crimes, there are reasons for underreporting. We have already alluded to the risks of reporting a fronting offence where one is also a guilty party, but some parties will not report a crime which does not affect them, because they do not want to become involved in investigations and trials. And, of course, many people are simply unaware that fronting occurs. All this does not mean that fronting is not a real problem.
At the B-BBEE Commission’s 4th Annual Conference earlier this month 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. Details were not provided as to what they were referred for, but even if it assumed that all referrals relate to fronting, one will see that the numbers are not as alarming as the popular press would lead one to believe.
Problems with fronting:
The Minister of Trade and Industry did say at the 4th Annual BEE Conference that while fronting needs to “ruthlessly eradicated”, it is equally important “to identify, support and value those who are doing the right thing”. So, it is important not to throw the baby out with the bath water. The B-BBEE Commission also repeatedly stressed that they urge companies to approach them to review structures or other arrangements they are considering so that they can give guidance/opinions as to how to make them compliant before they are implemented. (Tusker has taken this approach with our structures and continue to engage with the B-BBEE Commission and DTI as we innovate further).
Given our history, there is too much distrust in our society and fronting is immediately suspected to be behind many BEE transactions. This is often unfair, even though it may sometimes be the case. The vast majority of South Africans are not criminals and we should not lose sight that we must target the wrongdoers and not go for the innocent. The B-BBEE Commission is obligated to operate impartially and without fear or prejudice, which means that the B-BBEE Commission respects the principles of our legal system, including of criminal law.
So, if one acts wrongfully one should worry. If not, do not.
We recommend everyone to keep solid records of decisions made, resolutions, meeting attendance, participation in management, dividends, AGMs etc (standard governance stuff, but essential proof if ever you face a fronting allegation).
Please contact us if you’re looking for a B-BBEE investor/shareholder that’s 100% legitimate and can grow the value of your investment in your business.