BBBEE compliance, fronting – how alive and well is it really?

BBBEE complianceBBBEE compliance has become a popular item for debate.

It is common cause, that examples of fronting include very clear violations, where companies appoint their secretaries, tea ladies or gardeners as directors, often without their knowledge in order to qualify for contracts. This is commonly referred to as direct fronting.

Unfortunately the practice is not confined to clear violations constituting fraud. Examples include constructing transactions or agreements in such a way that there is no true empowerment. It is often more subtle. However subtle this may be, it still constitutes fronting. These practices are commonly known as indirect fronting.

To further elaborate on the concept of direct and indirect fronting, the DTI BBBEE strategy Document states the following about fronting: “The process of BEE must result in an increase in the ownership and control of the economy by black persons. This means that a significant proportion of black persons’ ownership of assets and enterprises must be a controlling interest, reflecting genuine participation in decision-making at board, executive management and operations levels, and the assumption of real risk.

Control means

  • The right or the ability to direct or otherwise control the majority of the votes attaching to the shareholder’s issued shares,
  • The right or ability to appoint or remove directors holding a majority of voting rights at meetings of the board of directors of that shareholder,

• The right to control the management of that shareholder. “

The Broad Based Black Economic Empowerment Act 53 of 2003 as amended (by the 2013 amendment Act) (“BBBEE Act”) has now codified / defined a fronting practice and has further introduced serious penalties. Therefore sound BBBEE compliance has become more imperative than ever.

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