BEE fronting a crime, states law

Question:

I recently lost a big tender. I’ve heard that the winning bidder, although more expensive, had a better BEE level than me because it is 51% black-owned. Now I also hear that they are subcontracting most of the work to another company. Surely this is not allowed?

Answer:

The Broad-Based Black Economic Empowerment Amendment Act of 2013 (“BEE Act”) introduced the crime of fronting, defining a fronting practice as including a “transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act.”

The definition is very broad and there has been a lot of confusion as to how this definition will be interpreted in practice.

Our courts recently provided more transparency on the matter, in the case of Prasa vs Swifambo Rail Agency.

In this case, Swifambo was accused by Prasa of fronting, because they had applied for a tender and then subcontracted the job to a multinational company.

The BEE codes require that multinational companies invest substantially in empowerment initiatives and the court found that the arrangement between Swifambo and the international company had the effect of circumventing these requirements.

The international company could reap the benefit of the contract without having the obligation of complying with the BEE requirements. The communities who would have benefitted from the empowerment initiatives were harmed by this transaction in general, which undermined the objectives of the BEE Act.

The court therefore found that Swifambo was “merely a token participant that received monetary compensation in exchange for the use of its BEE rating” and that, on a balance of probabilities, they were guilty of fronting.

The court held that it was not a requirement that there should be misrepresentation or even that there should be exploitation of a specific individual for fronting to be present.

If one then looks at your situation, based on the above decision, it does appear that there may be grounds for potential fronting by the company that has won the tender.

Our advice is to consult with your attorney to consider the merits of bringing the potential allegation to the attention of the relevant authorities.

– Marc Naudé, associate, Phatshoane Henney Attorneys

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