Fronting fraud is a serious crime that is preventing South Africa from transforming its economy
The Broad-Based Black Economic Empowerment (B-BBEE) Commission recently spoke out against fronting, stating that it is still a serious problem in South Africa. Rajan Naidoo, Managing Director of EduPower Skills Academy believes that the B-BBEE Commission is correct in once again highlighting this important issue.
Rajan explains: “Fronting fraud is a serious crime and a common occurrence in South Africa that obstructs economic transformation. It leads to companies taking opportunities away from those businesses that truly embrace transformative ideals and thus, comply with B-BBEE Ownership requirements.”
He says that B-BBEE will only succeed if companies that choose to implement it do so with the right intent which is to improve the experience of their fellow black South Africans. “Unfortunately, too many South African businesses still operate in an apartheid-based bubble, only emerging to undertake the bare essential activities before retreating once more into their perceived safe spaces,” he explains.
So what is fronting?
The B-BBEE Act was amended in 2013 to, among others, define a fronting practice as a “a transaction, arrangement or other act or conduct that directly or indirectly undermines the achievement of the objectives of the Act or the implementation of any of the provisions of this Act.”
While fronting is further defined by the Act in detail, Rajan says it can summarised as companies that pretend to be more compliant with B-BBEE policies than they actually are. “Fronting is a form of window-dressing in which black employees appear as beneficiaries, directors or shareholders but are in fact not,” he adds.
Signs of Fronting
Rajan says that while fronting is not always apparent the most common examples are where a company asserts that a lower-salaried black employee, such as a driver, is a director or holds a senior position in order for the business to appear B-BBEE compliant and secure a tender. This is also evident when black employees as listed as executives but at a notably lower salary than other executives.
“In a scenario like this, the black individual involved may not have deliberately tried to breach the Act but is still guilty of fraud. They will also face criminal charges together with the main perpetrators who devised the fronting plan,” says Rajan.
Another flag is that the company may comply with black ownership requirements but performs very poorly on the management control element of the scorecard. This means that on paper they have majority black owners but in practice, the company is still controlled by white or other minorities.
“In the private sector this may not technically be fronting but exclusion of black, particularly African management from decision making and controlling roles is fronting in spirit,” Rajan explains. “Many B-BBEE practitioners advise their clients to selectively optimise some areas of the scorecard and either ignore or deprioritise the management control element to achieve a predetermined overall B-BBEE level.”
Rajan says this selective manipulation of the B-BBEE scorecard is also common under skills development. Many companies comply technically by meeting numerical and financial spend targets, but they rarely focus on the true transformational intent of skills development, employability and employment.
“These companies select training partners that emphasise SARS tax rebates, price or other financial considerations but do not focus on the intended beneficiaries or their futures,” Rajan adds. “Commitment to high quality training is the only way to ensure that every Rand spent on skills will have a chance of yielding the employability or employment that South African’s – specially our youth – so desperately need.”
If B-BBEE fails in its intended goals, those who pay it lip service or are opposed to its compliance will also be those who will shout the loudest about it being a failed government policy.
“Fronting is not only preventing South Africa from transforming its economy, but from growing and developing it, too. As a nation we need to be deeply introspective about our nationhood, nation building and racial and ethnic polarisation as these personally held values impact the way we implement policies such as B-BBEE. We cannot legislate our way to nationhood, but rather our humanity, values and integrity is required to give policy its effect,” Rajan concludes.