21 Sep 2015

BEE Update: What Constitutes "Fronting"

by Erika Holmes, Partner, Durban,

The Broad-Based Black Economic Empowerment Amendment Act, 2013 ("the Act") introduced a definition of "fronting", a concept which had previously been based on the common law criminal concept of "fraud".

The definition is more specific than fraud as fronting must now specifically involve the circumvention of the objectives of the Act.Fronting is defined 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 objects of the Act include, among others, "achieving a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new enterprises".  Therefore, any practice which results in the frustration or circumvention of this objective could be classified as fronting, which carries a possible fine of 10% of annual turnover and/or a jail sentence not exceeding 10 years.  The soon-to-be-formed BEE Commission will also have the powers to investigate complaints relating to fronting and to make a determination on fronting.  It can then approach the courts for an interdict against the offender.

The following specific examples of fronting are included in the Act, but this is not an exhaustive list and other types of practices may well constitute fronting if they undermine or frustrate the objects of the Act. The examples of fronting practices include arrangements where :

  • Black persons appointed to positions in an entity are discouraged or inhibited from substantially participating in the core activities of that entity;
  • the economic benefits received as a result of the BEE status of an entity do not flow to Black people in the ratio specified in the relevant legal documentation;
  • a legal relationship with a Black person is concluded for the purpose of the entity achieving a certain level of BEE compliance without granting him the economic benefits that would reasonably be expected to be associated with his position; or
  • an agreement is concluded with another enterprise in order to achieve or enhance BEE status in circumstances in which:
  • there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;
  • the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
  • the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.

In addition, Statement 000 of the new BEE Codes of Good Practice provides that "Initiatives which split, separate, or divide a measured entity as a means of ensuring eligibility as an exempted micro enterprise, qualifying small enterprise or start-up enterprise may constitute an offence".

In addition, the Act now provides that any misrepresentation of an entity's BEE status or the provision of any false information to a BEE verification agent both constitute criminal offences which carry a possible fine of 10% of annual turnover and/or a jail sentence not exceeding 10 years.