Fronting explained

It’s important to do BEE right, not just because of the social impact but because fronting carries criminal charges – including jail for the people involved and massive fines for the business itself. The criteria for fronting include activities that circumvent either the letter or spirit of the B-BBEE Act i.e. they are far broader than a narrow interpretation of the law and anything ‘open to interpretation’ and an ’emotional & subjective topic’ is inherently risky. Fronting accusers are most likely going to be someone who you anger along the way – a former partner, employee, or BEE partner – or a competitor. Do it right and you don’t have this hanging over you forever…

BEE fronting is essentially a form of misrepresentation or fraud where a company pretends to be BEE compliant to secure contracts or other benefits, but in reality, it doesn’t meet the requirements of genuine Black Economic Empowerment. It’s a deliberate attempt to circumvent the B-BBEE Act and Codes of Good Practice.

Importantly, a key principle in fronting is that compliance with the B-BBEE Act is measured in terms of ‘letter and spirit’ of the Act. I.e. you can do something that meets the legal letter of the B-BBEE Act but not the spirit and be guilty of fronting. This wider definition means that one should always make sure you have a clear answer as to how the solutions you have put in place for B-BBEE meet the spirit of the Act, not just the letter of law – and this is arguably a higher, but more subjective bar…

Fronting can take many forms, including:

• Window-dressing: Having black people as shareholders, directors, or employees in name only, without giving them real economic benefits or decision-making power.
• Benefit Diversion: Structuring transactions where the economic benefits intended for black participants are diverted to non-black individuals or entities.
• Opportunistic Intermediaries: Using “front” companies that have no real operational capacity but claim to be BEE compliant to win tenders.
• Tokenism: Appointing Black people into positions without any real authority, responsibility, or commensurate pay.

How to Avoid BEE Fronting:

The key to avoiding fronting is to ensure that all BEE initiatives are genuine and substantive, with real economic benefits and control flowing to black participants. Here are some preventative measures:

• Due Diligence: Thoroughly vet all BEE partners, shareholders, and employees to ensure they meet the criteria and are not simply being used as fronts.
• Substance over Form: Focus on the genuine transfer of skills, ownership, and management control, rather than just ticking boxes.
• Independent Verification: Use reputable BEE verification agencies to assess your BEE status and ensure compliance.
• Clear Agreements: Have legally sound agreements that clearly define the roles, responsibilities, and benefits of all parties involved in BEE transactions.
• Ongoing Monitoring: Regularly review BEE structures and relationships to ensure they remain compliant and that benefits are flowing as intended.
• Ethical Leadership: Promote a culture of ethical conduct and compliance within the organization.
• Transparency: Be open and honest about your BEE initiatives and avoid any structures or practices that could be perceived as fronting.

Penalties for BEE Fronting:

The B-BBEE Act treats fronting very seriously. The penalties can be severe:

• Criminal Charges: Fronting is a criminal offense. Individuals involved can face up to 10 years imprisonment.
• Fines: Companies can be fined up to 10% of their annual turnover.
• Contract Cancellation: Contracts secured through fronting can be cancelled.
• Reputational Damage: Being labeled as a “fronter” can severely damage a company’s reputation and lead to loss of business.
• Disqualification from Tenders: Companies and individuals involved in fronting can be banned from doing business with the government.

Who is Likely to Report Fronting, and How is it Reported?

Fronting can be reported by a variety of parties:

• Employees: Disgruntled employees who are aware of fronting practices within their company.
• Competitors: Businesses that lose out on tenders due to fronting may report the suspected offenders.
• BEE Verification Agencies: Agencies may uncover fronting during the verification process.
• The Public: Anyone with information about fronting can report it.
• The B-BBEE Commission: The Commission actively investigates complaints and can initiate its own investigations.

Reporting Mechanisms:

• B-BBEE Commission: Complaints can be lodged directly with the B-BBEE Commission via their website or email. A specific form (Form B-BBEE7) is used for this purpose.
• Department of Trade, Industry and Competition (DTIC): The DTIC also has mechanisms for reporting fronting.
• Hotlines: some companies have hotlines.

Prosecution of BEE Fronting Cases:

1. Investigation: The B-BBEE Commission investigates complaints. This may involve gathering evidence, interviewing witnesses, and conducting site visits.
2. Findings: The Commission issues findings. If fronting is found, the Commission may:
   • Issue a notice of non-compliance.
   • Recommend prosecution to the National Prosecuting Authority (NPA).
   • Refer the matter to other regulatory bodies (e.g., SARS).
3. Prosecution: The NPA decides whether to prosecute. If they proceed, the case goes to court.
4. Court Decision: The court determines guilt and imposes penalties if the accused is found guilty.

Recent Fronting Cases (Summarized):

It is difficult to give the most up to date cases, but here are some examples that have been reported:

1. NJM Fronting Case (2024): Directors of NJM, a Gauteng-based company, appeared in court on BEE fraud charges. This case highlights the potential for criminal prosecution of individuals involved in fronting.
2. Sasol Oil Limited v B-BBEE Commission (2022): This High Court case involved a dispute over Sasol’s BEE status. While not solely a fronting case, it demonstrates the Commission’s scrutiny of BEE transactions.
3. Sand Shifters Africa (Pty) Ltd and Others v Commissioner (2023): This case involved alleged misrepresentation of B-BBEE status and fronting practices.
4. Wolseley Farm BEE Project (2018): Shareholders in a farming project were informed the project wasn’t profitable, raising concerns about potential fronting.
5. More than 680 Cases (2020): The DTIC reported over 680 cases of fronting, indicating the widespread nature of the problem.
6. Dimension Data (Didata) Deal (2024): A R1.4bn deal gave rise to a court judgment.
7. Complaint against Nokia Solutions and Networks South Africa (Pty) Ltd The B-BBEE Commission to determine whether the B-BBEE ownership element initiatives by Nokia Solutions and Networks South Africa (Pty) Ltd constitute fronting practices.
8. Complaint against Marissimo BEE Professional Verification and Services. The B-BBEE Commission is to determine whether the sale of shares by Marissimo BEE Professional Verification and Services was a fronting practice.
9. Passenger Rail Agency of South Africa (PRASA) and Swifambo Rail Agency Proprietary Limited: High Court Case.
10. Complaint against Media Post (Pty) Ltd: The B-BBEE Commission is to determine whether the certificate issued to Media Post (Pty) Ltd was obtained in contravention of the B-BBEE.

These cases are a reminder of the ongoing efforts to combat fronting and the potential consequences for those involved.

It is important to consult the B-BBEE Commission’s website and other official sources for the most up-to-date information on fronting cases and prosecutions. You can also stay informed of all things related to BEE ownership by subscribing to our newsletter.