In discussions about Broad-Based Black Economic Empowerment (BBBEE), the term “fronting” often comes up. This underhanded practice is making headlines in news about the progress of BBBEE, as a large number of businesses have been found guilty of it. But what exactly is fronting, and what are the implications? In this post, we delve into the subject to give you a better understanding.
A good BBBEE rating can confer many benefits on a company operating in South Africa. These include the ability to participate in preferential procurement, the ability to tender with government and large organizations, a progressive public image that can be leveraged in marketing strategies to attract new clients, and an edge over competitors. While BBBEE compliance is not compulsory under South African law, it is highly recommended and can bolster the success of a business. As a result, many people want a BBBEE certificate – and some are prepared to go to great lengths to get it. Some businesses have been using dishonest means to get the rating they want.
This is called fronting. Businesses that front are those that pretend to be more compliant than they are with the five sections on the BBBEE scorecard, or otherwise provide false information related to BBBEE compliance. The rate of fronting is staggering. According to the Department of Trade and Industry, a shocking 70 out of 109 companies surveyed this year were found to be fronting and circumventing the BBBEE Codes of Good Practice.
Fronting is extremely problematic, because it slows down the socio-economic progress that BBBEE is intended to create. It provides an artificial sense of change, leaving the workers who ought to benefit from it disgruntled and disempowered. It is, in effect, fraud, and is being taken increasingly seriously.
Under the new Codes of Good Practice, fronting is now a punishable offence. Companies found guilty could face a fine of up to 10% of their annual turnover, and directors can be fined in their personal capacity and receive a prison sentence of up to ten years. Furthermore, these firms will not allowed to do business with any government entities for a period of ten years, with ramifications for the tender process.
Suspected fronting can be reported to the Department of Trade and Industry for investigation. An example of fronting that is often seen is a company claiming that low-paid black employees such as drivers or garden workers are actually directors or hold other senior positions, in order to secure contracts. Suspicious activity includes the listing of black staff as shareholders or executives without their awareness thereof, the positioning of black staff as executives but with lower payment than that made to other executives, and a distinct lack of active participation of supposed black managers in top-level decision making processes.
The consequences of fronting are very serious, and could completely scupper a business. It is advisable that companies work with accredited BBBEE verification agencies to ensure that they are fully compliant and on the right side of the law.