South African companies trying to dodge BEE laws – commission warns of fines and up to 10 years in jail

Fronting – an act where a black person or entity is given a stake in a company but does not get the powers associated with it – remains the biggest challenge to the power of the B-BBEE Act to deliver on transformation, says South Africa’s B-BBEE commission.

Speaking in a webinar on Thursday (22 October), B-BBEE commissioner Zodwa Ntuli said that of the 822 complaints received since 2016, 687 (83%) were related to fronting.

The mining, transport, construction and engineering sectors account for most of the fronting complaints.

“The commission considers compliance with the B-BBEE Act as critical to achieve the envisaged change in the patterns of ownership through the transfer of productive assets of the South African economy to black people,” she said.

“Fronting and misrepresentation sabotage this, with these fraudulent schemes and falsification of status.”

After fronting, falsified BEE certificates (70) and contractual complaints (42) accounted for the most common complaints received by the commission.

The B-BBEE Act requires that all organs of state and public entities include B-BBEE requirements in determining qualification criteria for issuing of licences, concessions or other authorisations, sale of assets, incentives and grants, and implementation of preferential procurement.

Given B-BBEE requirements, some non-compliant entities as aided by consultants or advisors, and with the involvement of rent-seekers in most instances, devised structures and schemes to circumvent the requirements to access these government opportunities, which amount to fronting practice. This is often done in a sophisticated way and difficult to detect at times.

The schemes range from basic ownership structures with one or two shareholders to complex structures involving thousands of people through multiple corporate vehicles that purport to have black ownership.

In some instances, non-compliant entities simply bought B-BBEE certificates with a compliant status from unscrupulous verification agencies, all these practices aimed at accessing contracts, licences, and incentives from the government.

“We want the public to know about these cases of fronting and misrepresentation of B-BBEE status to raise awareness of these practices that are detrimental to transformation and criminal in nature, with a view to identify and prevent them from occurring in our economy.

“Our ability to publish findings in cases is restricted by the Act, and this has significantly affected communication to the public,” said Ntuli.

Ntuli warned that the consequences are dire, and any person convicted of fronting may be imprisoned for up to 10 years and an entity may be fined up to 10% of their annual turnover in accordance with Section 130 of the B-BBEE Act.

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South African companies trying to dodge BEE laws – commission warns of fines and up to 10 years in jail