What the law says
Knowingly engaging in a fronting practice is a criminal offence. The underlying definition is much wider than most business owners expect, and — this is the part that surprises people — you do not have to have lied to anyone. But the offence has two parts: the practice, and knowledge of it. Both matter, and we deal with them in turn.
The B-BBEE Act defines a “fronting practice” as follows.
“a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act or the implementation of any of the provisions of this Act, including but not limited to practices in connection with a B-BBEE initiative—”
Note — The definition was inserted by the B-BBEE Amendment Act 46 of 2013. The four examples that follow are expressly “including but not limited to” — so the real test is the opening words, not the list.
The definition then gives four examples. In plain terms:
- (a) — arrangements in which black people appointed to the business are discouraged or inhibited from substantially participating in its core activities. The title is real; the involvement is not.
- (b) — arrangements in which the economic benefits received as a result of the business’s B-BBEE status do not flow to black people in the ratio specified in the relevant legal documentation. The money does not match the paperwork.
- (c) — concluding a legal relationship with a black person for the purpose of achieving a level of compliance, without granting the economic benefits that would reasonably be expected to go with the status or position they hold. A relationship on paper only.
- (d) — an agreement with another business to achieve or enhance a B-BBEE status “in circumstances in which” there are significant limits on who you may deal with, or the business is unlikely to be able to keep operating on its own resources, or the terms were not negotiated at arm’s length and on a fair and reasonable basis.
A word of honesty about limb (d): the Act does not join the three circumstances with “and” or “or”, so whether they must all be present, or any one of them will do, is not settled by the wording. We flag that rather than pretend it is clear.
Of the four, the example most likely to catch an ordinary business is the second one — where economic benefits do not flow to black people in the proportions set out in your own documents. If your shareholders’ agreement records a black shareholder as entitled to 51% of the economics, but the money does not actually reach them in that proportion, the gap is visible on the face of your own paperwork. No outside evidence is needed — the inconsistency is already there in the documents you filed.
What it costs
Fronting is not the only offence in this part of the Act. Section 13O creates a family of related offences, and it helps to see them side by side, because a business can trip over one without going near the others.
- Fronting itself — knowingly engaging in a fronting practice is an offence (s 13O(1)(d)).
- Misrepresenting your B-BBEE status — knowingly misrepresenting, or attempting to misrepresent, the B-BBEE status of a business is a separate offence (s 13O(1)(a)). This is the one a false EME or QSE affidavit engages.
- False information to a verification professional — knowingly giving false information to a verification professional, to secure a particular status or a benefit associated with compliance, is a third offence (s 13O(1)(b)).
- False information to an organ of state — knowingly giving false or misrepresented information relevant to assessing a business’s B-BBEE status to any organ of state or public entity is a fourth (s 13O(1)(c)). This is the one a tender submission engages.
The penalties, in section 13P, are serious.
- For an offence under section 13O(1): a fine, or imprisonment for up to 10 years, or both. If the convicted person is not a natural person (a company, for example), the alternative is a fine of up to 10% of its annual turnover. The turnover fine is an alternative to the other penalties, not an addition to them.
- In fixing the fine, the court must take into account the value of the transaction which was derived from, or sought to be derived from, the offence. The bigger the deal, the bigger the exposure.
- A person convicted may not do business with any organ of state or public entity for 10 years from conviction, and must be entered in the register of tender defaulters. Where the convicted person is a company, the court has a discretion to confine that ban to the members, directors or shareholders who actually contravened the Act.
- Failure to report is a lesser offence. A verification professional, or a procurement officer or official of an organ of state, who becomes aware of an offence under section 13O(1) — or an attempt to commit one — and fails to report it, commits an offence carrying a fine or imprisonment for up to 12 months. Note how much shorter that maximum is than the 10 years for the offences themselves.
What the courts have done
A short but important caveat before the cases. These come from procurement reviews and investigations, not from criminal trials. They are useful on substance, and on what a decision-maker must look at — but they do not remove the requirement of knowledge for a conviction under section 13O. A contract can be set aside as fronting without anyone being convicted of a crime.
The one-year investigation limit the court relied on in Interwaste sits in Regulation 15(4) of the B-BBEE Regulations (Government Notice R.689 in Government Gazette 40053, 6 June 2016) — you can read it in the sources. In Interwaste the court dealt with the time bar at paragraphs 74–76, the reversed onus at paragraphs 98–100, the “substantiated evidence” point at paragraph 107.3, and the order at paragraph 115.
The warning signs
A note on what follows. The B-BBEE Commission publishes material on fronting, but there is no official gazetted checklist of “fronting indicators” that we can point you to as authority. What follows is our own list of the features that recur in structures that have run into trouble. Beside each one we have set out which part of the law it engages, so you can see the basis for it rather than take our word for it. It is a prompt for asking questions, not a legal test — the legal test is the one in the definition quoted above.
- The black shareholder cannot vote, or their votes are controlled by somebody else. Exercisable voting rights are votes “not subject to any limit” (Schedule 1), and in Viking Pony the Constitutional Court treated the question whether black shareholders exercised control matching their ownership as central.
- The black shareholder has no seat on the board and no role in strategy. Compare limb (a) of the definition — black persons appointed to a business who are discouraged or inhibited from substantially participating in its core activities — and Viking Pony on active involvement in management.
- No money actually reaches the black shareholder — no dividends, no trickle, nothing, for years. Compare limb (b): economic benefits not flowing to black people in the ratio specified in the legal documentation. Note that the Minister has said a business cannot be penalised on the scorecard merely for not having declared dividends, so this is a question to ask rather than an answer in itself.
- The black shareholder’s rights can be cancelled by the other party. Compare limb (c): a relationship concluded for the purpose of achieving compliance without granting the economic benefits reasonably expected to attach to it.
- A price recorded as paid, but neither paid nor payable. The black shareholder is recorded as having paid, but it was funded in a way that never has to be repaid out of anything real, so nothing is ever genuinely at stake and nothing is ever genuinely received (compare limb (c)). Note the distinction: a genuine free carry, where shares are simply given, is a different thing altogether — it is lawful and scores full net value. The concern here is a paper price.
- Dependence on an arrangement that limits who you may deal with, or was not at arm’s length. The business depends on an arrangement with another business for its rating, and that arrangement limits who it may deal with, or was not negotiated at arm’s length. This is limb (d), almost word for word.
- A side agreement the verification agency will not see. There is a side agreement that changes the effect of the documents shown to the verification agency. This engages both the opening words of the definition and the separate offence of providing false information to a verification professional (section 13O(1)(b)).
“Exercisable Voting Rights” means voting rights that are not subject to any limit.
Note — The other authorities behind this list are section 1 of the B-BBEE Act (definition of “fronting practice”, paragraphs (a) to (d), and s 13O(1)(b)) and Viking Pony 2011 (1) SA 327 (CC). The point about undeclared dividends comes from the Minister’s Practice Note (General Notice 428 in Government Gazette 44591, 18 May 2021), paragraph 2.10.
Frequently asked questions
No. The B-BBEE Act defines a “fronting practice” very widely — any transaction, arrangement or conduct that directly or indirectly undermines or frustrates the objectives of the Act. In Swifambo the court held that a fronting practice needs neither a misrepresentation to the organ of state nor exploitation of the black participant. It is enough that the arrangement undermines the objects of the Act. That said, a criminal conviction still needs knowledge — you must have done it “knowingly”, which the Act defines to include what you ought reasonably to have known.
The example most likely to catch an ordinary business is the one about economic benefits. Limb (b) of the definition covers arrangements where the economic benefits of your B-BBEE status do not flow to black people in the ratio set out in your own legal documents. If your shareholders’ agreement records a black shareholder as entitled to 51% of the economics, but the money does not actually reach them in that proportion, the gap is visible on the face of your own paperwork. No outside evidence is needed.
No. A genuine free carry, where shares are simply given, is lawful, and it scores full net value on the ownership scorecard. What the warning signs are aimed at is a paper price — a price recorded as paid, but funded in a way that never has to be repaid out of anything real, so nothing is ever genuinely at stake and nothing is ever genuinely received. The concern is the fiction, not the generosity. See how ownership deals are funded.
No. In Viking Pony the Constitutional Court held that where there is a reasonable suspicion of fronting, an organ of state must investigate — and the real question is whether the previously disadvantaged shareholders were actively involved in managing the business and exercised control matching their stated ownership. Confirming the shareholding documents was held not to answer that question. A share register records who owns the shares; it does not prove that ownership is real in substance.