The proposed changes to the Broad-Based Black Economic
Empowerment ("B-BBEE") codes now intend to make
"ownership" a compulsory priority element.
Around 95% of companies fall into the Exempt Micro-Enterprises
("EME") category.1 However, an EME that is
100% owned by black people automatically qualifies as a level 1
contributor and an EME that is more than 50% owned by black people
automatically qualifies as a level 2 contributor. EMEs that are
black owned will gain a distinct competitive advantage.
Additionally, if the amendments are passed in their current
form, failure to comply with the minimum threshold means that the
rating (for large enterprises) will drop two levels in status, and
Qualifying Small Enterprises ("QSEs") will drop one
level. Rather than face the consequences, some companies may find
fronting to be an appealing alternative.
BEE and Fronting
The BBBEE Amendment Bill was introduced in an attempt to improve
the implementation of the existing B-BBEE Act. In order to meet the
B-BBEE Act's requirements and receive the benefits thereof,
companies were engaging in "fronting". This entailed
misrepresenting the two requirements of the B-BBEE Scorecard, being
black ownership and management and control. B-BBEE Act sought to
move the focus from direct empowerment to include development of
human resources and indirect empowerment, which allowed companies
to achieve adequate B-BBEE levels without necessarily focusing on
ownership and management – areas which could mean reduced
shareholder returns or relinquishing control. With the proposed
changes, and renewed focus on direct empowerment, the Department of
Trade and Industry ("DTI") may re-introduce some of the
challenges faced by the original BEE Act, which B-BBEE Act sought
There are three categories of fronting, namely: window dressing,
benefit diversion and opportunistic intermediaries.2
Window includes the circumstance in which black people are cases in
which black people are appointed or introduced to an enterprise on
the basis of tokenism Benefit diversion entails initiatives
implemented where the economic benefits received as a result of the
B-BBEE Status of an enterprise do not flow to black people in the
ratio as specified in the relevant legal documentation. The action
of opportunistic intermediaries is to conclude agreements with
other enterprises with a view to leveraging the opportunistic
intermediary's favourable B-BBEE status in
Companies may engage in fronting to appear compliant with
ownership, but may be diverting benefits or operating through
opportunistic intermediaries. The latter is difficult to police.
The current codes state that organisations may not be awarded
points for BEE if they indicate that they intend sub-contracting
more than 25% of the contract to an organisation with a lower BEE
score than itself. This means that an organisation cannot tender
for business based on its B-BBEE score if it does not intend to
perform the vast majority of the work. However, in reality, this is
almost impossible to monitor and we may see an increase in black
owned opportunistic intermediaries as vehicles for fronting.
Currently there are no means in place to prosecute companies in
the event of fronting and companies receiving contracts on
fraudulent grounds. Amendments have such been made to the B-BBEE
Act and are currently waiting to be passed by Parliament. The
proposed amendments include the setting up of a commission in order
to monitor the action of fronting by companies and making such an
act up for criminal prosecution.
The focus of B-BBEE is again moving towards direct empowerment.
Companies that want to maintain or improve their B-BBEE status, but
who do not currently comply with ownership, need to start planning
for how they will meet the minimum threshold for this scorecard
Failure to comply with company law in Hong Kong can be very expensive for businesses. In a highly dynamic business and regulatory environment such as Hong Kong, it is challenging for business owners to remain fully aware of the latest legal requirements.
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