Government needs to take corrective action urgently as fronting in the black economic empowerment (BEE) space has increased and is becoming more devious, says Gavin Levenstein CEO of consulting group EconoBEE.
Levenstein said fronting is defined by the Department of Trade and Industry (DTI) as a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes. “We continue to see this happening and have reported at least twenty instances to the DTI and SANAS in the past months”.
He said government’s inability to stop fronting is yet another form of condoned corruption. “We have written to the minister numerous times and while we have received a response, we would far rather prefer that he take action, than politely acknowledge our letter”.
Common types of fronting include EME fronting which transpires in a number of ways. Companies create new entities, and transfer all old assets into them, thus creating a “start-up”. Many agencies and accountants do not check if it is “merely a continuation of an existing business”, in which case it is not a start-up. They simply issue a certificate. The verification manual states that all agencies must conduct an on-site visit to verify the entity. However, SANAS has not accredited an agency for code 000 (where the definition of an EME is contained), allowing them to by-pass the SANAS requirements for a site visit. Often a simple visit to the business will give a good indication if the business is an EME (turnover of less than R5 million, depending on sector). He said if the business has 50 staff, there has to be a question mark around its EME status. If the business has one customer which spends R6 million a year with it, there has to be a query if it says that its turnover is less than R5 million.
Levenstein added that “in one case we found that the accountant based his “letter” on VAT figures supplied by his client showing that his client is not only cheating on B-BBEE, but also cheating on the taxman which is really cheating every other South African”.
There is also QSE fronting where companies deliberately show a turnover of less than R35 million, depending on sector.
There is sector code fronting where companies and verification agencies producing a certificate based on the wrong set of codes. “This often is due to the agency not having the required accreditation for the sector that his client belongs to. Ironically the agency will deny any wrongdoing, but quickly get his accreditation and from then on will verify his clients using the correct sector codes”.
Isolated companies are still forging certificates.