DIANNE HAWKER

A BEE LAW specialist says fronting has become a more sophisticated type of fraud over the years.

Ana Milovanovic of Webber Wentzel in Joburg says it’s no longer just a case of companies using unqualified people as directors.

Milovanovic says in the past it was common practice for companies to simply transfer shares at a nominal value to a new shareholder, who would ultimately transfer them back at the same low value, without getting much benefit.

“Complex structures may be put into place to disguise what is ultimately fronting. The simple test is whether the economic value in the hands of a black partner is growing, even in instances where the majority or all of the dividend flow is being applied towards the repayment of the acquisition debt. The ability of the shareholder to ultimately exit his or her shareholding and sell the shares at value is also indicative of true empowerment, as opposed to fronting,” she says.

Milovanovic also says the level of responsibility given to a black director is indicative of fronting.

“In terms of the Companies Act 71 of 2008 (as well as the previous Companies Act) the board of directors is responsible for the management of the company. Directors are required to attend board meetings and contribute to the decision-making pertaining to the company. Although the directors may delegate certain of their functions to various committees (especially in larger companies) the directors remain responsible for all decisions taken concerning the company,” she says.

If a black shareholder suspects they are being used for fronting, they have a number of avenues of recourse, including prompting an investigation by authorities.

“As long as a person is registered as a shareholder and hold share certificates, he or she can demand to be treated as a shareholder. This means access to company’s records in terms of section 26 of the Companies Act, and other relief from oppression if a shareholder believes that the affairs of the company are being conducted in a manner which disregards the interests of the shareholder.

“From a more practical perspective, the person in question can report the suspicion of fronting to the verification agency. If no verification agency was involved, then the suspected fronting practice can be reported to the government department or state owned enterprise which issued and awarded the tender. It, similarly, will have a duty to investigate,” she says.

Meanwhile the Department of Trade and Industry is piloting new legislation aimed at creating harsher punishment for fronting. In the Broad-Based Black Economic Empowerment Bill fronting is defined as a “transaction that directly or indirectly undermines of frustrates the achievement of the objectives of the act”. It goes on to specify that appointing a black person to an enterprise while inhibiting or discouraging from “substantially participating in the core activities” as illegal.

The bill says that it will be illegal when economic benefits do not flow to black individuals in the ratio specified in the relevant documentation; when a legal relationship is concluded with a black person for the purposes of BEE compliance without granting the individual economic benefits.

The bill legislates the establishment of a B-BBEE Commission which will receive and investigate complaints and maintain a registry for B-BBEE transactions above a certain threshold.