The department of trade and industry and the leaders of the business community have launched a verbal war on fronting — the circumvention of the Black Economic Empowerment (BEE) Act by misrepresenting black ownership — but practical measures will have to be put in place to combat it effectively.
After a recent meeting of the BEE advisory council, Rob Davies, the trade and industry minister, declared that the government needed to step up a gear in tackling fronting. Making a distinction between the representation and substance of BEE deals, Davies said: “The people who are supposed to benefit are not benefiting from deals. We need to become much more energetic on combating
fronting.”
The minister enjoys the support of Busa [Business South Africa], which has criticised companies that want to increase their chances of procurement by falsifying their credentials. The government has indicated that it will sign an agreement with the Special Investigations Unit, which will hunt down those involved in what is essentially a fraudulent practice. But Busa has already said that the lack of specific clauses in the Act to criminalise fronting is a shortcoming.
Kganki Matabane, the executive director of transformation and internal operations at Busa, said: “We have noticed that what is common to all forms of fronting is the intention to circumvent BEE policies and would like to caution on the detrimental effect this has on the economy. We should all be aware that transforming the socioeconomic imbalances is crucial not only as a
social responsibility but also because it is conducive towards the long-term political and economic stability. “BEE is therefore in the interests of both business and society.”
Matabane said fronting debilitated transformation by keeping sustainable black enterprises from participating meaningfully in the mainstream economy. “It obstructs the meaningful transfer of skills and economic benefits to black persons and prevents those with skills from making a substantive contribution to their employer.
Ultimately, fronting is holding South Africa back from achieving its transformation, developmental and economic goals.” Matabane said often the problem was that emerging black contractors from the townships did not read the fine print of new deals that they entered into and realised only later when there were problems that they had been duped.
He said his organisation received cases on a weekly basis that they referred to the department for action. The complaints mostly relate to:
- Black people whom a company claims are shareholders or executives while they are unaware or uncertain of their role in the company;
- Black people who serve in management positions but are paid significantly less and/or have less decision-making authority than their white counterparts at the same level; and
- The manipulation and exaggeration of company data such as the racial composition of staff or the extent of procurement from empowered entities.
Busa said: “We recognise that fronting is not only confined to the misuse of black employees or partners to improve a white-owned company’s BEE credentials unfairly. Collusion also occurs, often in the form of a black person or a black-owned enterprise entering into a questionable partnership mainly and selfishly for pure financial gain, without any intent of making a real contribution to the business at hand.”
The Young Communist League of South Africa (YCLSA), the youth wing of the Communist Party, said black people who allowed themselves to be used in that fashion were also equally deserving of condemnation.
Gugu Ndima, the league’s spokesperson, said: “Equally, black men and women who permit [themselves] to be used as fronts must be held accountable and punished. The renta-black-face culture has distorted the actual intentions of the BEE/ BBBEE [broad-based black economic empowerment] policy and we have seen an increase in passive, self-proclaimed businessmen and tenderpreneurs as opposed to genuine skilled entrepreneurs.”
He said BEE-rating agencies, which were used by many companies, were often complicit in covering up lack of compliance for some companies. “As the YCLSA, we applaud the minister for affirming that BEE-rating agencies are culprits to this crime. The YCLSA has previously raised the issue of BEE-rating agencies. The government should strongly consider putting verification of BEE status and accreditation under the government to curb corruption. After companies have been awarded with the certificate, there is no guarantee that the status quo in companies remains the same. It’s shocking that accountants and lawyers have joined the bandwagon of finding sophisticated ways of fronting,” Ndima said.
Fronting has become such an issue that KPMG in its annual BEE survey also asked companies if they believed that fronting measurement indicators should be introduced as part of BBBEE verification. In its report it says the majority of respondents were in favour of introducing measurement indicators.
“In addition respondents were asked if they believed that the fronting indicator grading should be published on the BBBEE verification certificate issued. Looking across industries, the majority of the respondents believed this grading should be published.”
Matabane said Busa was proposing that the BEE Act be amended to criminalise fronting. “Our laws at the moment do not speak of fronting as a criminal act, hence the reliance on the fraud laws. We have already proposed that, but changing a law can be a lengthy process.”