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DTI Fronting

What is Fronting?

  • An entity, mechanism or structure established to circumvent black economic empowerment.

Fronting Risk Indicators

  • Black people which an Enterprise claims are its shareholders, executives or management are unaware or uncertain of their role or participation within an Enterprise;
  • Black people identified by an Enterprise as its shareholders, executives or management have roles and responsibilities which differ significantly from those of their non-black piers;
  • Black people who serve in executive or management positions in an Enterprise are paid significantly lower that the market norm, unless all executives or management of an Enterprise are paid at a similar level;
  • There is no significant indication of active participation by black people identified as top management at strategic decision making level;
  • An Enterprise only conducts peripheral functions and does not perform the core functions reasonably expected of similar Enterprises;
  • An Enterprise relies on a third-party to conduct most core functions normally conducted by Enterprises similar to an Enterprise;
  • An Enterprise cannot operate independently without a third-party, because of contractual obligations or the lack of technical or operational competence;
  • The Enterprise displays evidence of circumvention or attempted circumvention;
  • An Enterprise buys goods or services at a significantly different rate than market from a Related Person or shareholder;
  • An Enterprise obtain loans, not linked to the good faith share purchases or enterprise development initiative, from a Related Person at an Excessive Rate; and
  • An Enterprise shares all premises and infrastructure with a Related Person, or with a shareholder with no BEE status or a third-party operating in the same industry where the cost of such premises and infrastructure is disproportionate to market-related costs.

Fronting & B-BBEE

  • The B-BBEE Act as it stands makes no provision for Fronting.
  • The Act further does not define Fronting as a criminal offence and what would constitute Fronting, thus the Codes of Good Practice have not introduced the concept of Fronting as a criminal offence.
  • Under Common law "intentional misrepresentation" would constitute Fraud.
  • In terms of Fraud one would be required to prove a fraudulent transaction and the actual and potential loss suffered before a penalty can be imposed by a court.

Legislation Explored for Dealing with Fronting:

  • Section 254, 257 and 258 of the Companies Act:
    Due to their specific requirements it might be difficult to deal with fronting under these sections:-
  • Section 254 & 257 : Precludes close corporations, partnerships and sole proprietors from investigation under these sections.
  • Legislation Explored for dealing with fronting
  • Prevention and Combating of Corrupt Activities Act may deal with Fronting indirectly as Fraudulent misrepresentation may constitute an offence, however this will not be under the auspices of B-BBEE.
  • There is no specific law intended to combat Fronting in the context of B-BBEE.
  • Fronting by its nature contravenes the objectives of the Act and thus to effectively deal with it, the possibility of making it a punishable offence is currently being explored.
  • Possible measure available to deal with Fronting at this stage is for an Entity's B-BBEE scorecard to be declared null and void if that Entity is found to be engaged in Fronting.

Procedure for reporting Fronting

The following diagram depicts the procedure for reporting fronting practices:

Step 1

Identify fronting indicators.
Notify entity about the indicators
Entity to submit representation within 14 days

No Explanation

Step 2

Notify the fraud hotline or the dti's BEE Unit in writing

Step 3

The dti to initiate an investigation

If entity found to be
engaged in Fronting

The dti may completely disregard/suspend a measured entity's BEE scorecard until such time that the Entity takes corrective action The dti will keep a database of all companies found to be engaged in fronting once all the necessary processes are completed

Way Forward

  • Amendment of the B-BBEE Act to address Fronting as a punishable offence.
  • All Fronting cases are to be reported to dti for further investigation.
  • The dti will keep a database of all companies found to be engaged in Fronting.
  • Training and capacity building.
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