BEE compliance has become a major aspect of South African business, with many companies considering it a make-or-break point. With the threat of losing business due to lower compliance these companies are turning to the BEE scorecard and looking for loopholes and ways to manipulate the system in their favour. Deceiving to appear more BEE compliant than what is the reality is known as B-BBEE fronting.
What is BEE fronting?
B-BBEE fronting, simply put, is a form of window dressing. These companies put up a ‘front’ which makes them look more BEE compliant, when in actual fact the impression of compliance does notexist. An example of BEE fronting practices has been found where black employees who earn a lower salary such as cleaning staff are listed as directors. However, these employees are entirely unaware of their listed position and do not receive any of the authority or benefits of their supposed position.
Another known example of BEE fronting practices involves genuinely appointing black executives. However, although they are officially and knowingly appointed as executives, they are in fact paid significantly lower salaries than other ‘real’ executives and usually given less authority as well. Using people as ‘figureheads’ in this way and showing off a level of BEE compliance which is false in practice is exactly what B-BBEE fronting is.
Is it legal?
B-BBEE fronting is most definitely not legal. Given the deceptive nature of BEE fronting practices and the vague legal formulations surrounding them, this issue has unfortunately proven legally slippery and problematic. However, as BEE fronting practices – when properly identified – are defined as fraudulent and misrepresentative. These practices are defined in the 2013 B-BBEE Amendment Act as a statutory offence. Under the B-BBEE Codes of Good Practice, fronting is now recognised as a criminal offence.
Despite B-BBEE fronting being officially classified as a criminal offence many companies are still trying to find ways to make use of fronting practices. For companies caught making use of these BEE fronting practices the penalties are severe. If found guilty businesses face the possibility of being fined up to 10% of their annual turnover or a prison sentence of up to 10 years. Another hefty penalty, especially for companies that rely on government contracts, is to be prohibited from doing business with the government in any manner for a period of 10 years.
BEE fronting practices are a reality and, as evidenced by the hefty penalties, a serious risk for any company involved in such practices. If you want to be sure of your BEE compliance or want to be sure that you are not unknowingly guilty of any BEE fronting practices, contact a professional in business legal compliance and ensure your compliance.