The level of black economic empowerment in the economy remains extremely modest, compelling government to change the law, Trade and Industry Minister Rob Davies said on Thursday.
Briefing journalists ahead of a parliamentary debate on the Broad Based Black Economic Empowerment (BBBEE) Amendment Bill, Davies said the proposed law aimed to plug gaps in current legislation.
He cited findings from the presidential advisory council on BBBEE, which was established shortly after the new administration under President Jacob Zuma took office.
“In fact it [BBBEE] in the private and public sector together came in at a level of eight, which means basically not really making a significant contribution to BEE at all,” Davies said.
A level one BEE rating meant companies were 100 percent black-owned, while an eight rating meant there was no or very little empowerment.
“By and large we haven’t got very much of the empowerment of suppliers of bigger businesses. We also found there were significant challenges of fronting in the economy,” said Davies.
The amendment bill was aimed at dealing with those guilty of fronting.
“Most of us know fronting [is when companies] take the cleaner, the gardener and call them the CEO of the company and they are not actually the CEO. They are just put up there so the company can present itself as a black-owned company.”
Davies said the practice had evolved as companies had resorted to more complex methods of fronting.
“Some of it [fronting] is embedded in contracts where people are given discounted voting rights on boards, positions on boards which are public relations orientated rather than [contributing to the] natural direction of the company,” he said.
The company would then present itself as an “empowered company”.
“Not only is it a disadvantage to people who are put up as fronts, but it is also a form of fraud because you are presenting yourself to various authorities, various procurement agencies in the country as qualifying for the benefits which are available to BEE companies,” he said.
There were a few cases where companies were convicted of fraud because of fronting. However, prosecuting companies under the common law offence of fraud was problematic and protracted as it competed with various other cases in the “criminal domain”.
The amendment bill provides a statutory definition of fronting and seeks to establish a dedicated institution to deal with the practice.
“[The statutory definition] covers a whole range of possible forms of fronting,” Davies said.
“Then we will establish a commission to deal with cases of fronting… without fear or favour… operating in the department [of trade and industry] and it will receive complaints of fronting, seek solutions… But in the worst cases can also then pursue the penalties that are provided for in the bill.”
The new bill provides for stiff fines for companies and their owners who lie about empowerment credentials.
If convicted in court, the company could face a fine of 10 percent of its turnover, or the person responsible for misrepresenting the BEE status could go to jail for up to 10 years.