A united front – acute term for fraud

One of the things that I am particularly bad at concealing is my disdain for the ANC government, specifically Rob Davies' little kolkhoz, formally known as the DTI. It is staffed by incompetents. I really shouldn't moan because they give me something to write about. As I might have mentioned before the BEE Commissioner is going to focus on fronting. Forget about everything else – the money is in fronting. BEE needs fronting because it gives legitimacy to the arbitrary laws and policies that the government foists on us. What is this fronting then?

Fronting defined

The Department of Trade and Industry regard the practice of fronting as a "scourge" and have gone to great lengths to stamp out the practice. Fronting has now been incorporated into the Broad-Based Black Economic Empowerment Amendment Act and is recognised as an offence with prescribed maximum penalties. The maximum penalty is either 10 years in prison or 10% of the company's annual turnover.

Definition

A fronting practice means a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act or the implementation of any of the provisions of this Act, including but not limited to practices in connection with a B-BBEE initiative

1. in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;
2. in terms of which the economic benefits received as a result of the broad-based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;
3. involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or
4. involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which—
   1. there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;
   2. the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
   3. the terms and conditions were not negotiated at arm's length and on a fair and reasonable basis;

Frustrates the objectives of the BEE Act

This has to be the starting point of any measure of fronting. The objectives are contained in section 2. There are eight objectives, these are the most significant:

1. promoting economic transformation in order to enable meaningful participation of black people in the economy;
2. achieving a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new enterprises;
3. increasing effective economic participation and black owned and managed enterprises, including small, medium and micro enterprises and co-operatives and enhancing their access to financial and non-financial support.

It is relatively easy to show compliance with these three objectives via a series of documents, whether legal or otherwise. However, all codes of good practice make it very clear that the intention of these documents can be interrogated.

Proving fronting

Whilst fronting has been specifically created as a crime by the BEE Act, it is suggested that it is very similar to the common law crime of fraud. There are numerous definitions of the term fraud but this one appears to be the most comprehensive.

"Fraud is the unlawful, intentional making of misrepresentation which causes actual prejudice to another or holds potential prejudice to another"

Five elements must be proved simultaneously for a conviction under fraud, these are

• prejudice,
• misrepresentation,
• unlawfulness,
• causality and
• criminal intent.

Each must be proven by the state beyond a reasonable doubt.

Function of the BEE Commission

The BEE Commission, under commissioner Zodwa Ntuli, performs a variety of functions. These are, inter alia,

1. to oversee, supervise and promote adherence with this Act in the interest of the public;
2. to receive complaints relating to broad-based black economic empowerment in accordance with the provisions of this Act;
3. to investigate, either of its own initiative or in response to complaints received, any matter concerning broad-based black economic empowerment;

Regarding paragraphs (c) and (d) above, section 13F(2) protects against arbitrary allegations of fronting or offences.

(2)    A complaint contemplated in subsection (1)(c) and (d) must be—

(a)    in the prescribed form; and

(b)    substantiated by evidence justifying an investigation by the Commission.

Upon receiving a complaint in accordance with 13F(2) the Commission may

If (it is) of the view that any matter it has investigated may involve the commission of a criminal offence in terms of this Act or any other law, it must refer the matter to the National Prosecuting Authority or an appropriate division of the South African Police Service.

Mitigating against the possible occurrence of fronting

As has been discussed above the mere allegation of fronting will hold no water with the commission. The alleger would need to provide suitable evidence that there is a possibility that fronting may have occurred. The crime of fronting has yet to be tested in a court of law. Until this happens it is suggested guidelines contained in both the BEE Act and Strategy Document are used as a yardstick to measure what you are about to do.

BEE Act

Section 3 of the further requires that

(1) Any person applying this Act must interpret its provisions so as—

(a)    to give effect to its objectives and purposes;

The BEE Act in its preamble states that the intention of the Act is (inter alia) to promote the achievement of the constitutional right to equality, increase broad-based and effective participation of black people in the economy and promote a higher growth rate, increased employment and more equitable income distribution;

Amended BEE Code Series 000, Statement 000.

2.1 The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.

This paragraph permits an interested party to look beyond the legal framework of the deal or structure and look for the intention. Typical fronting activities under these circumstances are black shareholders who have no knowledge of the business or their shareholding.

2.2 In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.

The BEE strategy document

This lists the following key principles that underpin the national BEE strategy.

• Black Economic Empowerment is broad-based.
• Black Economic Empowerment is an inclusive process.
• Black Economic Empowerment is associated with good governance.
• Black Economic Empowerment is part of our growth strategy.

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