Fronting

Fronting

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. Verification agencies, and /or procurement officers and relevant decision-makers may come across fronting indicators through their interactions with measured entities.

Fronting Practices

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;

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.

Opportunistic Intermediaries: This includes enterprises that have concluded agreements with other enterprises with a view to leveraging the opportunistic intermediary’s favourable B-BBEE status in 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 arms-length on a fair and reasonable basis.

Responsibility to Report Fronting

In order to effectively deal with the scourge of Fronting, verification agencies, and/or procurement officers and relevant decision makers are encouraged to obtain a signed declaration from the clients or entities that they verify or provide business opportunities to, which states that the client or entity understands and accepts that the verification agency, procurement officer or relevant decision maker may report Fronting practices to the dti. Intentional misrepresentation by measured entities may constitute fraudulent practices, public officials and verification agencies are to report such cases to the dti.

Fronting Indicators

The black people identified by an enterprise as its shareholders, executives or management are unaware or uncertain of their role within an enterprise;

The black people identified by an enterprise as its shareholders, executives or management have roles of responsibility that differ significantly from those of their non-black peers;

The black people who serve in executive or management positions in an enterprise are paid significantly lower than the market norm, unless all executives or management of an enterprise are paid at a similar level;

There is no significant indication of active participation by black people identified as top management at strategic decision making level;

An enterprise only conducts peripheral functions and does not perform the core functions reasonably expected of other, similar, enterprises;

An enterprise relies on a third-party to conduct most core functions normally conducted by enterprises similar to it;

An enterprise cannot operate independently without a third-party, because of contractual obligations or the lack of technical or operational competence;

The enterprise displays evidence of circumvention or attempted circumvention;

An enterprise buys goods or services at a significantly different rate than the market from a related person or shareholder;

An enterprise obtains loans, not linked to the good faith share purchases or enterprise development initiatives, from a related person at an excessive rate; and

An enterprise shares all premises and infrastructure with a related person, or with a shareholder with no B-BBEE status or a third-party operating in the same industry where the cost of such premises and infrastructure is disproportionate to market-related costs.

Procedure for reporting of Fronting :

The following diagram depicts the procedure for reporting Fronting practices:

Complex Structures and Transactions, and Fronting