BBBEE Fronting Practices – Recent Clarification

frontingAccording to the Department of Trade and Industry (“DTI”), fronting means a deliberate circumvention or attempted circumvention of the Broad-Based Black Economic Empowerment Amendment Act No. 46 of 2013, as amended, (the “Act”) and the Codes.

The Act introduced the 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 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”.

There are serious consequences to fronting practices and it is vital that businesses vigilantly review their existing and future B‑BBEE initiatives including ownership structures.

Verification agencies come across fronting indicators through their interactions with measured entities. The Act sets out a list of examples of fronting, but there is no exhaustive list of what exactly constitutes fronting or examples thereof.

Generally speaking, examples of fronting are for instance when a black gardener or domestic worker is added to a company’s share register, but they have never been informed of this.  Similarly, when a person is appointed as black shareholder but does not actively take part in any decisions made in the company. These are easy to spot, but if it is not so clear cut?

In the recent High Court case of Passenger Rail Agency of South Africa (PRASA) and Swifambo Rail Agency Pty Ltd (“PRASA case”), the Court set out certain useful guidelines on the “fronting practice” definition in the Act.

The case highlights the importance of ensuring that both existing and future BBBEE initiatives are compliant with the requirements of the Act and the Codes.

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