Why BEE fronting is a bad idea – and won’t be tolerated any longer

Last week the B-BBEE Commission said it had initiated investigations against specific entities for possible violation of the B-BBEE Act relating to B-BBEE ownership structures and non-compliance with the Codes of Good Practice in respect of the verification process.

The press release listed 17 entities which are being investigated including Netcare, MTN Group and Nokia Solutions and Networks South Africa.

Back in June 2017, a complaint of BEE fronting was laid against JSE listed Netcare Holdings, which operates the largest private hospital network in South Africa.

The complaint was lodged with the Broad-Based Black Economic Empowerment (B-BBEE) Commission, which was officially launched towards the end of 2016.

Soria Hay, head of corporate finance at investment firm Bravura, outlines the significance of this for the South African corporate sector.

Bravura pointed out that MTN is being investigated to determine whether the MTN Zakhele and the MTN Zakhele Futhi B-BBEE schemes meet the requirements for black ownership elements and comply with the B-BBEE Act.

In the case of Nokia, the B-BBEE ownership transaction involving the employee trust and Sekunjalo Investment through specific entities (resulting in 26% black ownership), and the subsequent change in black ownership (resulting in 31.28% black ownership) by Sekunjalo Investment, are also being scrutinised.

Two government-related entities are also on the list, said Bravura. Eskom is being investigated to determine whether the entity complied with the requirements of section 10(1) of the B-BBEE Act in the issuing and awarding of the Duvha Power Station tender to a Chinese company, which is alleged not to be B-BBEE compliant.

The complaint against South African Social Security Agency (SASSA) is that the tender for the payment of social grants to Cash Pay Master Services (CPS) was awarded to a company (CPS) that is engaging in a fronting practice in violation of the B-BBEE Act, said Hay.

“There also seems to be a specific clamp down on B-BBEE verification agencies,” she added.

Severe penalties possible

If found to have been in violation of the B-BBEE Act, the entities may be referred for prosecution and exposed to a fine of up to 10% of the entity’s annual turnover – and the individuals involved can be fined or imprisoned for up to 10 years, said Bravura.

“The entities can also be excluded from doing business with government for a period of up to 10 years, and the contracts they have with any state owned entity or government department can be cancelled.

“The B-BBEE Commission may also approach a court of law to restrain any breach or for any appropriate remedial relief, which may include setting aside a specific transaction or initiative,” Bravura’s Hay said.

Ownership as a Core Objective

The investment firm said that the B-BBEE Commission made it clear on its launch roadshow last year that there will be a particular focus on ensuring that the B-BBEE ownership element is being adequately and sustainably addressed.

At its core, the objective is to change ownership patterns within the South African economy, with a targeted minimum of 25.1% ownership – although there are specific sectors and industries where this requirement is higher.

However, Hay said that the true participation of black South Africans in the local economy cannot be increased as long as entities are allowed to engage in fronting practices. “The Commission correspondingly stressed that it would clamp down on undesirable practices which affect ownership, but also on practices which could impact the other elements of the B-BBEE Scorecard.”

Bravura explained that fronting has been 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, including but not limited to practices in connection with a B-BBEE initiative”.

Hay said that the main consequences of fronting are the hindrance to the goal to make black South Africans the main participants in the local economy, and allowing them to participate in the economy and the advancement of the country.

“It is important for companies to scrutinise their current B-BBEE structures and address anything that is inconsistent with scorecard requirements, in order to avoid serious potential penalties,” the specialist said.

Read: MTN, Nokia and others under investigation for allegedly breaking BEE laws: report

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Why BEE fronting is a bad idea – and won’t be tolerated any longer