Fronting will land you in quicksand

Fronting will land you in quicksand

MAIN IMAGE: Maryna Botha, director STBB

Maryna Botha

Honesty is the best policy for estate agencies when it comes to B-BBEE compliance as opposed to taking a costly risk with window-dressing or fronting.

B-BBEE compliance feels like a somewhat unknown territory for many estate agencies, especially the smaller ones of which there are so many. With the coming into law of the Property Practitioners Act and the requirement that agencies must have a B-BBEE certificate before a Fidelity Fund certificate will be issued to it, many questions arise. In this article, we provide a map to the territory to make it more familiar.

The map outline

The purpose and mechanics of B-BBEE in South Africa is such that if businesses are prepared to assist in promoting the objectives of the Act, and in the present context, assist with transformation in the real estate industry to attract more black participants, these businesses should in turn be rewarded by means of a higher B-BBEE compliance level, which will increase their competitiveness and grow their own businesses.

No business transaction will make business sense if it is not financially or strategically beneficial to both parties.  Thus the underlying consideration is that in assisting black people to be incorporated into the main stream of economic activity in the real estate industry, the entities doing so need to derive benefit from it – otherwise business endeavours to change the world or to solve the shortcomings of government or take over the responsibilities of government in this regard may struggle to reap benefits.  In this instance, the benefit comes in the form of being eligible to enter into often very lucrative contracts with government.

Lying about the lay of the land

‘Fronting’ refers to any initiative or practice that frustrates or undermines the objectives of the B-BBEE Act. A ‘fronting practice’, in the same vein, refers in general to those activities or transactions that cover up the actual activities of a person or group.

Circumvention practices are not unique to the B-BBEE environment. Legislation such as the Income Tax Act, the Companies Act and the Labour Relations Act, describes such practices as anti-avoidance, circumvention or non-genuine operations or activities.

In the context of B-BBEE, fronting is also referred to as window-dressing or tokenism. The term ‘fronting’ or ‘fronting practice’ was, for the first time in 2005, officially incorporated into the then B-BBEE Codes of Good Practice (B-BBEE Codes) and Guidelines.

When employing fronting or window dressing techniques, the business’ aim is to pretend to be more racially transformed than it really is, in order to improve its BEE scorecard which, in turn, makes it eligible for (often very lucrative) government tenders.  Window-dressing therefore includes instances where companies list black people as beneficiaries, directors or shareholders so that they appear to have proper broad-based B-BBEE status, but where these individuals do not in fact hold those positions. Other examples of BEE fronting include positioning black employees as executives but with a significant lower salary compared to other executives, or a lack of active participation by alleged black managers in top-level decision-making processes.

Landing in the quicksand

Before 2013, fronting was, from a criminal justice point of view, dealt with under the common law offence of fraud. With the enactment of the B-BBEE Amendment Act in 2013, knowingly engaging in a ‘fronting practice’ became a statutory offence. If found guilty, businesses could face a fine of up to 10% of their annual turnover or up to 10 years in prison. Another penalty could be that businesses would be prohibited from doing business with government for a period of 10 years.

Our courts have been asked to deal with disputes that involved an allegation of fronting on the side of one of the litigating parties. Judgements show that our courts examine the inner working of transactions in great detail, to ascertain the truth.

Seeing the wood from the trees

The Property Practitioners Act requires, as we have mentioned, that every estate agency must be in possession of a BEE certificate before a Fidelity Fund certificate will be issued to it. In the absence of the FCC, the property practitioner may not charge commission or in the event of already receiving such, it must thereafter be refunded.

The agency must therefore be in possession of a BEE certificate. There is no requirement that a specific level must be attained. All this requirement means then is that the agency (property practitioner) has undergone a verification process with a BEE auditing company. The company will rate the estate agency as being a BEE contributor between level 1- and 8 (level 1 being the highest). As long as the estate agency obtained this certificate (as well as the other required documents), the agency will be issued with an FFC.

Therefore, in terms of current provisions, the only time that a property practitioner will need to have achieved a certain level of BEE certification, is when the estate agency wishes to do business with an organ of state, where a specific BEE rating is a pre-entry requirement.

The road to transformation

The Property Practitioners Act also provides that once it commences, the Property Sector Transformation Charter which will apply to all property practitioners.  An Amended Property Sector Code was issued earlier this year by the Property Sector Charter Council. The Code reflects, in essence, agreement between industry role-players and the Council on ways to improve the rate of transformation in the real estate industry. This includes a scorecard which attributes scores to different aspects of an organisation (such as employment equity, skills development, and so forth). In addition, depending on the annual income/commission earned of the estate agency, a certain score is allocated to the various fields.

The Property Practitioners Act also focuses on transformation. A Transformation Fund is to be created within six months of when the new regulating body, the Property Practitioners Regulating Authority is established. It will be funded by the Fidelity Fund, government grants, fees and fines paid by property practitioners, investments, and monies donated or bequeathed to the Authority. The funds are earmarked to be used to promote the interests of the historically disadvantaged, including providing for training and development and education of the general public.

About the author: Maryna Botha is an admitted attorney, notary and conveyancer and the marketing director of national law firm, STBB. She currently specializes in all aspects of property law and conveyancing, as well consumer and credit law. She lectures widely on these topics and publishes regularly on all aspects related to property law.

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