03 Apr
2018

Fronting: What is it?


fronting

 

One of the most talked about topics in the industry: Fronting

Over the past year, fronting has become one of the most talked about topics that have been raised in the industry when it comes to B-BBEE. There have been and continue to be ownership structures that have been implemented without offering any benefit to the BEE partners. The Amended B-BBEE Act of 2013 also criminalises fronting which can carry penalties of up to 10% of annual turnover and/or imprisonment for up to 10 years.

All companies should understand the risks of any B-BBEE initiatives that have been implemented and whether such initiatives could be seen as attempting to circumvent the B-BBEE codes or B-BBEE Act.

The following is a list of possible fronting practices

  • Opportunistic Intermediaries – “Enterprises that have concluded agreements with other enterprises with a view to leveraging the opportunistic intermediaries favourable B-BBEE status in the circumstances where the agreement involves:

• Significant limitations or restrictions upon the identity of the opportunistic intermediary’s suppliers, service providers, clients or customers
• The maintenance of their business operations in a context reasonably considered improbable having regard to resources; and
• Terms and conditions that are not negotiated at arm’s length on a fair and reasonable basis”.

  • Benefit Diversion – “This includes initiatives implemented where the economic benefits received as a result of the B-BBEE Status of an enterprise do not flow to black people in the ratio as specified in the relevant legal documentation.”
  • Window-dressing – “This includes cases in which black people are appointed or introduced to an enterprise on the basis of tokenism and may be:

• Discouraged or inhibited from substantially participating in the core activities of an enterprise; and
• Discouraged or inhibited from substantially participating in the stated areas and/or levels of their participation;”

It is thus of vital importance that companies assess any fronting risks within an organization and ensure that all initiatives are concluded and comply with the spirit of the B-BBEE Codes of Good Practice. Should you require an assessment in terms of any B-BBEE initiatives to assess any risks, call Thrive Corporate Advisors to book a consultation.

 

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