Over the years we have seen more and more creative ways to front. We have reported virtually all BEE fronting activities to the Department of Trade and Industry (DTI), or SANAS or IRBA, as well as the sector councils. Regretfully, little or in most cases no action is taken against offenders.
Most often the DTI does not even contact the offender to even try get their side of the story. Each agency passes the buck onto another. Sadly the problem could be solved today if they wanted to. The DTI places hope on the Amendment Bill and BEE Commission to solve the problem. It is going to take some time before the Bill is enacted and at least another year before the BEE commission is staffed, never mind up and running. In the meantime practically, you can front with impunity and as far as the DTI is concerned you will not be challenged or face penalties.
We are going to list and explain many of these fronting activities, not to help you front, but to warn you against them and help identify those activities. Unfortunately, if the DTI takes no action, fronting and mis-representation is going to continue, and escalate. More so the more prevalent the fronting activity and the more coverage it gets the harder it will be for the company concerned or the legislative authorities to ignore it. By explaining how each form of fronting works will hopefully expose it so that it is stopped.
The B-BBEE Amendment Bill says:
‘fronting practice‘ means 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 -. It goes on to include various ownership and management issues.
An EME is automatically level 4. An EME is one that has an annual turnover of less than R5 million (depending on industry and sector code), or is a startup enterprise. Many companies are either stating that their turnover is less than R5 million, or that they are a startup. An extreme case was a 50 year old company that created a new company (using the identical name as they have always had). The new company, with the same name as the previous company had a registration date of 2011. Their auditor, also a verification agency, issued them with a level 4 EME statement. This was notwithstanding that the company has been in business for 50 years and has a turnover of well over R100 million, 2200 employees, 9 branches. The codes define a startup as being a newly established entity – that (is) not merely a continuation of an existing business. They did not disclose to their agency that they were a well established business, and the agency (also their auditor) did not check.
Same/Similar name fronting:
This is an extension of the EME fronting. A company creates another company, with a similar name. It does no, or very little business so this new business is small and an EME, or sometimes a QSE. Every call for a BEE certificate is met with the EME certificate, while the actual operating company is non-compliant. A multi-national personnel agency produced an EME certificate for its management company of a similar name. The management company earns income in the form of profits from the operating company and pays it to their head office overseas. Its income is less than R5 million, and two independent verification agencies have issued it with an EME certificate. Neither agency asked why a non-operating company whose only income is from “management fees” of the local operating business and whose only expense is paying profits over to a foreign country would want a BEE certificate. Their only “customer” is their foreign holding company that will never ask or require them to have a BEE certificate. Neither of the verification agencies asked why the main operating business did not have a BEE certificate.
We have hundreds of examples of where this is happening.
Apparent Ignorance Fronting
Another company, a labour broker used the “same name” fronting activity, of having two similar sounding names and when caught out explained that they thought that they could not become compliant because they had no black ownership, so HAD to create a new business. They even went as far as finding a black person to hold 52% of a non-operating business, while their genuine business had a turnover of nearly R100 million. To its credit, their verification agency on becoming aware of this practice refused to verify the front company the following year.
A JSE listed company has produced a BEE certificate for a QSE showing 51% black ownership. Its only difference is they added the letters ‘SA ‘ onto the end of the name. The main operating business is well over R500 million. When reported to their verification agency, the agency did approach them. They then moved to another SANAS accredited agency who were prepared to continue this practice. SANAS took no action.
Holding Company Fronting
Many companies are owned by a holding company. What they do wrong is look only at the income of the holding company, and not the total income of the entire group. Since some holding companies have their own separate financials for their own (head office) activities, they show the verification agency a turnover of less than R35 million, while the entire group has a turnover in the billions. An extreme example is a listed company with a turnover of R1.3billion that had a very lean head office – with a turnover of less than R5 million. This company produced and used an EME certificate.
We still see forged certificates bearing names of well known verification agencies. The companies involved always blame their “verification agency”, but they must surely know that no verification, site visit was performed, and no file produced.
We are even beginning to see certificates using the EMEX or Harvard letterheads. Both companies no longer exist. Fronters probably use those logos knowing that no one from EMEX of Harvard will complain or catch them out. Some really dumb criminals have used our own letterhead without knowing that we do not verify.
This piece was firstly distributed through the electronic newsletter of EconoBEE.
EconoBEE is a high profile BEE consulting firm.