15 April 2020 by and Corporate & Commercial Alert

Black Economic Empowerment: Can black people front?

The commission of a fronting practice is criminalised under the Broad-Based Black Economic Empowerment Act (B-BBEE Act). A fronting practice is any transaction, arrangement or conduct that undermines or frustrates the achievement of the objectives of the B-BBEE Act or its implementation.

Fronting, as well as other offences such as misrepresenting or attempting to misrepresent the B-BBEE status of an entity or providing false information to a verification professional or to any organ of state or public entity, carries a penalty of a fine and/or imprisonment of up to 10 years. In the case of an entity other than a natural person the fine can be as much as 10% of its annual turnover.

The mischief the legislature is seeking to address, amongst other things, is to ensure that those entities and persons seeking to achieve B-BBEE compliance do so in manner that does not amount to a sham, as this will most certainly undermine or frustrate the achievement of the objectives of the B-BBEE Act. It will be a sham if, for example, a black person is appointed to a senior managerial position notionally responsible for managing a division or business operation but then that black person is effectively precluded or discouraged from actually discharging that function or exercising the rights and responsibilities flowing from that position.

Another example of a sham that could amount to fronting is if a black person acquires shares in an entity with the expectation that she would be entitled to an economic return based on her ownership of that shareholding, only for it to later materialise that this is not the case as, unbeknownst to her, there is another arrangement in place whereby the economic benefits that would have been due to her in the ordinary course, are effectively diverted to, say, the other shareholders.

In both these examples, the black persons involved were effectively misled and certainly were not party to the sham. But what if, for whatever reason, the black person involved was knowingly a party to the sham arrangement?

This could happen in a scenario where, for instance, the black person appointed to a senior managerial position knows that she does not have the requisite skills or competencies to execute the function assigned to her (and is reasonably unlikely to be able to acquire those skills and competencies) – and ultimately, that she will hold that managerial position in name only – but nevertheless (for whatever reason) goes along with it.

Another example is where a black person acquires a certain shareholding in a company knowing that she is not going to receive the economic benefits that would normally be associated with that shareholding, but nevertheless goes along with the arrangement, and in so doing is party to misrepresenting the actual B-BBEE status of the company.

In these instances, the black person involved is arguably no longer a victim but actually party to the unlawful conduct.

An important consideration in this context is that the offence of fronting (and the other related offences) is committed when one ‘knowingly’ does so. ‘Knowingly’ is defined in the B-BBEE Act as meaning that a person either had actual knowledge or was in a position in which she, acting reasonably, ought to have had actual knowledge or otherwise investigated the matter or taken other measures which, if taken, would reasonably be expected to have provided such actual knowledge.

While there has always been a principle in our law that ignorance of the law is no excuse, under the B-BBEE Act, ignorance of the facts, let alone the law, will not necessarily constitute a defence to a charge of fronting (or the related offences) as the Act requires one to actually take reasonable steps to ascertain the actual state of affairs. Merely indicating that “I did not know what was actually going on” if I was in a position where I could reasonably have ascertained this, will not help me if I am accused of fronting or one of the other related offences.

So, unless you have reasonably interrogated all relevant facts and circumstances, having regard to you role or position in relation to the B-BBEE transaction, scheme or initiative, you could also find yourself having to face criminal charges alongside the other perpetrators who devised and carried out the unlawful scheme. In these circumstances we would suggest that it matters not whether you are black nor whether you may also have been prejudiced through the execution of the unlawful scheme. If you wilfully or even negligently participate in an unlawful scheme or arrangement such as fronting you could also be the subject of criminal sanctions.

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