The act of "fronting", where non-empowered companies win contracts by feigning black economic empowerment (BEE) credentials, may soon be criminalised.
This is the intention of the Department of Trade and Industry (DTI), said Janeez Hafizulla, the department's deputy director of the BEE unit, speaking at the Black IT Forum's annual conference in Johannesburg yesterday.
The term "fronting" comprises a set of business practices that undermine the objectives of BEE, explained Siyabonga Ndabezitha, chief officer of transformation at Business Unity South Africa.
He said there have been many instances where a "white company" has exaggerated its ownership and management-control status, in order to win contracts based on perceived empowerment credentials.
Another common method of fronting, he added, is when a black-owned company wins a contract and then outsources or subcontracts the work to a white firm at a slightly lower cost - and then pockets the difference.
Defeating the purpose
Black IT Forum chairman Mthunzi Mdwaba points out that this practice does not in any way help skills transference and skills development.
"Collusion between white and black participants is well-known - relationships are structured to give the impression that an arrangement is an empowered one," Ndabezitha told delegates.
He questions why many black businessmen make themselves available for fronting positions, but then reasoned that some of them do not realise they are being used as a facade by an empowered company to raise its status.
Ndabezitha noted that sometimes genuine black companies with the necessary skills and senior people simply do not exist.
Whistle-blowing
This sentiment is shared to some extent by the DTI's Hafizulla, who illustrated how arduous the process of transformation can be, saying the DTI itself is currently at a level of 39% preferential (black firms) procurement.
It was expected that, by now, the department would procure 80% of its required products and services from empowered companies.
Ndabezitha urged verification agencies and all other parties to report fronting practices to the minister of trade and industry.
"The strategy for combating fronting is not a final solution to the problem of misrepresentation in BEE transactions, but we can minimise the impact." He added that he understands it is often extremely difficult to recognise fronting.
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