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WHAT IS "FRONTING" ?

We posed this question to some BEE experts:

There is currently no legal definition of a "front". There are a number of criteria's and questions that can be asked to establish compliance with the scorecard, where, unless certain conditions are fulfilled in our system a red flag goes up that shows if the company is a suspect and needs further investigation.
There is a document in front of the portfolio committee of justice in parliament at present which contain penalties that will be applicable to company shareholders and directors for fronting. I presume that this document will contain a definition of a front.
Mannie Hirsch
GESTALT

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I have not yet come across a official definition of fronting, but you may want to consider this one:

"Fronting - Tokenism, superficial inclusion of historically disadvantaged individuals." from Cape Gateway
http://www.capegateway.gov.za

Also have a look at this article:
http://www.cliffedekker.co.za/a_sndmsg/news_view.asp?I=60615&PG=24

The DTI BEE strategy Document says the following about fronting:
"The process of BEE must result in an increase in the ownership and control of the economy by black persons. This means that a significant proportion of black persons’ ownership of assets and enterprises must be a controlling interest, reflecting genuine participation in decision-making at board, executive management and operations levels, and the assumption of real risk.

In the scorecard, direct empowerment focuses on ownership of enterprises and assets through shares and other instruments that provide the holder thereof with voting rights and economic benefits, such as dividends or interest payments.

Control means:
        • The right or the ability to direct or otherwise control the majority of the votes attaching to the shareholder’s issued shares,
        • The right or ability to appoint or remove directors holding a majority of voting rights at meetings of the board of directors of that shareholder,
        • The right to control the management of that shareholder.

This emphasis on control does not detract from the important role that passive ownership of assets through pension and provident funds, unit trusts, and other collective investment schemes can play in BEE. However, passive ownership by black people is in itself not sufficient to bring about a real transformation of our economy. Without active participation in managing worker-owned funds, and similar investment instruments, investors have very little control over the direction of investment decisions made by fund managers.

Passive ownership of enterprises can also lead to a form of ‘fronting’ and this needs to be guarded against.

I trust that this information will be helpful.
Regards,
Monique TERRAZAS
monique@isupportafrica.com

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