Following on from part one published last month; as your business becomes BBBEE compliant, the business will grow. As such, once the R50 million turnover threshold is met, it is important for your organisation to have a strategy in place that can be implemented to become fully compliant with all elements.
We often describe BBBEE compliance, as EME or QSEs, only during the first phase in the strategic planning process. But, it is of the utmost importance that a phase two be discussed and implemented as soon as the first phase or structure has been concluded.
If this is not done, compliance may not only prove to be impossible on short notice, but may also prove to be extremely costly. Imagine this – not having enough time to implement the strategies to ensure compliance and as a result having a reduced recognition level for the next financial year. This could impact revenue streams, not to mention the increased costs resulting from the short notice of compliance.
It goes without saying that we strongly advise against incomplete, short-sighted and any ‘short cut solution’ planning. Most notably, because it could constitute a fronting practice.
Related: Why EMEs and GSEs automatically qualify for level 1 and 2 recognition
What is Fronting?
“A ‘fronting practice’ means a transaction, arrangement or otheract 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 BBBEE initiative -
- in terms of which black persons who are appointed to an enterprise arediscouraged or inhibited from substantially participating in the core activitiesof that enterprise;
- in terms of which theeconomic benefitsreceived as a result of the broad-based black economic empowerment status of an enterprisedo not flow to black people in the ratio specified in the relevant legal documentation;
- involving theconclusion of a legal relationshipwith a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliancewithout granting that black person the economic benefitsthat would reasonably be expected to be associated with the status or position held by that black person; or
- involving theconclusion of an agreement with another enterprisein order to achieve or enhance broad-based black economic empowerment status in circumstances in which —
- there aresignificant limitations, whether implicit or explicit, on theidentity of suppliers, service providers, clients or customers;
- the maintenance of business operations isreasonably considered to beimprobable, having regard to the resources available;
- the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.”
From the above it is clear that the definition of fronting has not only been codified, but also elaborated, to not only outlaw transactions in clear contravention with individuals, but also agreements with other entities. In addition, it also includes any transaction, arrangement, or other conduct that undermines the achievement of the objectives of the BBBEE Act.
This definition has not yet been tested by the courts and may be refined over time. Notwithstanding this, we recommend that clients do not engage in fronting and that a conservative approach strictly in accordance with the BBBEE Act is followed in order to comply and avoid fronting.
Related: The revised B-BBEE codes
Penalties for fronting practices
According to Fin24, the penalty for fronting is a fine or a maximum of 10-years imprisonment, or both. In addition, if a person so convicted is not a natural person, the court may restrict all members, directors or shareholders who participated in the fronting.
Further, “A person convicted of fronting will also be disqualified from contracting or transacting with any organ of state or public entity for a period of ten years.”
The ramifications of engaging in fronting may therefore not only tarnish your reputation but may completely cripple your business.
Why follow the rules
BBBEE compliance should not be treated as a compliance box needing to be ticked off. If it is approached in this way, businesses, in my view, do not only run the risk of the compliance and associated recognition level being short-lived, but also run the risk of being guilty of a fronting practice.
In simple terms – don’t take any short cuts. If it is too good to be true, it usually is. Rather seek advice from a specialist professional and make compliance part of your overall