The amended B-BBEE Act and revised Codes have made it more difficult for certain business enterprises to maintain the B-BBEE level they once enjoyed. As a result, business enterprises must be careful not to allow this to open their doors to fronting.

According to the Department of Trade and Industry, “Fronting means a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes. Fronting commonly involves reliance on data or claims of compliance based on misrepresentations of facts, whether made by the party claiming compliance or by any other person”.

In terms of the B-BBEE Act, “Fronting Practice means a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the B-BBEE Act or the implementation of any of the provisions of the B-BBEE Act, including but not limited to practices in connection with a B-BBEE initiative”.

The objective of the B-BBEE Act is to facilitate broad-based black economic empowerment. This involves the viable economic empowerment of all black people - in particular women, workers, youth, people with disabilities and those living in rural areas - through diverse but integrated socio-economic strategies. Such strategies may include:

  • increasing the number of black people that manage, own and control enterprises and productive assets;
  • facilitating ownership and management of enterprises and productive assets by communities, workers, co-operatives and other collective enterprises;
  • increasing the number of black people that manage, own and control enterprises and productive assets;
  • human resource and skills development;
  • achieving equitable representation in all occupational categories and levels in the workforce;
  • preferential procurement from enterprises that are owned/managed by black people; and
  • investment in enterprises that are owned/managed by black people.

There are various indicators that a business enterprise is fronting for another. Where an enterprise only conducts peripheral activities, as opposed to the core functions reasonably expected of it (and other, similar, businesses), or where it relies on third parties to perform such core functions, fronting may be taking place. Similarly, instances where a business enterprise cannot operate independently without a third-party, either because of contractual obligations or the lack of technical or operational competence, could be indicative of a fronting practice.

Some specific examples of a fronting practice include a transaction, arrangement or other act relating to a BBBEE initiative that:

  • involves having a legal relationship with a black person for the purpose of that business enterprise achieving a certain level of BBBEE compliance, without granting such black person the economic benefits that would reasonably be expected to be received;
  • would result in the economic benefits received as a result of the BBBEE status of a business enterprise not flowing to black people in the ratio specified in the relevant legal documents;
  • discourages or inhibits black person, appointed to a business enterprise, from substantially participating in the core activities of the business enterprise; and
  • involves concluding an agreement with another business enterprise in order to achieve or enhance the BBBEE status in circumstances in which:
  • there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers or customers;
  • the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available; or
  • the terms and conditions were not negotiated at arm’s length and in a fair and reasonable manner.

It is an offence to engage in a fronting practice. Persons found guilty may be subject to a fine or to imprisonment for a period not exceeding 10 years or to both a fine and such imprisonment or, if the convicted person is not a natural person, to a fine not exceeding 10 per cent of its annual turnover.

In addition, the offender may not conduct any business with any organ of state or public entity for a period of 10 years and shall be entered into the register of tender defaulters.