THE Department of Trade and Industry is proposing tough new penalties for fronting, including fines and imprisonment of directors, and other far-reaching changes to black economic empowerment (BEE) legislation and its accompanying codes.
Trade and Industry Minister Rob Davies said yesterday the changes, proposed in an amendment bill published for public comment recently, would "address some of the issues raised by the Presidential Advisory Committee on BEE".
Among the most significant proposals, he said, was the question of "complex fronting", "which used to be fraud but is now an offence" and the revision of the codes "which will require minimum scores for supporting black entrepreneurs through enterprise development and procurement".
The Black Economic Empowerment Amendment Bill also makes it clear it will trump all other empowerment-related legislation, including sector-specific charters negotiated by industry.
For the mining and oil sectors, whose charters were promulgated under different legislation, the implications are significant.
If the bill is passed in its present form, industry charters will need to fall in line with the balanced scorecard approach in the codes, which in particular, analysts say, will affect the way that black ownership is measured. Chamber of Mines CEO Bheki Sibiya said the chamber would participate actively in processes around the bill, but believed that the mining charter, with its specific targets "should remain the instrument to regulate transformation in the mining industry, and will be making representations along these lines".
The CEO of ratings agency Empowerdex, Vuyo Jack, said that while it was "a good development to have a uniform way of measuring transformation", changing the way ownership was measured in deals that had already been done would be very difficult.
While the mining and oil sectors will be particularly affected, the implications will be felt by all companies, whose BEE activities will be under close scrutiny. Changes to the codes will also change the way a company’s BEE ratings are calculated, making it harder to qualify for BEE status without engaging in meaningful procurement or nurturing sustainable black-owned enterprise.
Eliminating fronting through the introduction of harsh penalties is a key focus of the bill.
The bill defines fronting very broadly as any "transaction that directly or indirectly undermines of frustrates the achievement of the objectives of the act". Certain practices are specified as illegal:
- when a black person appointed to an enterprise is discouraged or inhibited from substantially participating in the core activities ;
- when economic benefits do not flow to black individuals in the enterprise in the ratio specified in the relevant documentation; and
- when a legal relationship is concluded with a black person for the purposes of BEE compliance without granting the individual the economic benefits.
Joint ventures formed with black enterprises to win specific contracts, and arrangements in which paper black enterprises win supplier contracts on the grounds of BEE status and then pass these on to genuine suppliers, will also be declared to be fronting.
The director-general of trade and industry, Lionel October, said fronting through joint ventures has been rife in sectors such as construction and information technology. There has been a tendency for large firms, when bidding for state tenders, to form one-off joint ventures with black enterprises, which close shop when the tender is completed.
"Some of the very big firms in these sectors do this. We want to bring about genuine joint ventures that create sustainable enterprises. We also want to put an end to a situation where a black businessman wins a contract to supply equipment to government, for example, but all he does is add his 10% and pass the contract on to the real supplier."
Penalties for fronting may include a fine, a prison sentence of up to 10 years, or both. Any contract awarded on the basis of false information will be cancelled at the sole discretion of the state and the implicated companies black-listed by the Treasury.
In order to investigate complaints and encourage compliance the bill proposes a Black Empowerment Commission, which will draw on the help of the Special Investigating Unit and the National Prosecuting Authority. The commission will also keep a register of empowerment deals to track and analyse progress.
It " will be a champion for BEE, especially in parts of the economy where there has been very little empowerment, such as retail, manufacturing and agriculture. It will deal with disputes, investigate fronting and start to institutionalise empowerment."
(BusinessDay)
