Mail and Guardian

LISA STEYN - Sep 30 2011 00:00

As tighter laws have been implemented to stop fronting, companies are also innovating in ways to cheat the system.

Despite stricter rules and regulations, methods of fronting (misrepresenting a black economic empowerment, scorecard) have evolved and BEE verification agencies continue to see an increase in the number of cases. In recent months EconoBEE, a BEE consultancy, has reported at least 20 cases to the department of trade and industry and the South African National Accreditation System (Sanas).

Chief operating officer Gavin Levenstein said that before the company reported an issue to the department it was investigated fully to be sure not to waste the department's time and not to accuse any business falsely. "We do this because we are concerned about fronting, but also because we do not want our clients to earn points from invalid certificates and then themselves get accused of questionable practices."

But fraudulent practice is becoming more prevalent and more devious. "It used to be fairly obvious and relatively easy to catch out, but the methods of hiding these days are becoming more and more difficult to discover," he said. In their investigations, EconoBEE has identified four common ways of fronting:

Exempt micro enterprises
Companies with a turnover of less than R5-million are generally exempt from producing BEE scorecards, except in selected industries, such as tourism, where the limit is R2.5-million. But companies go to great lengths to qualify for exemption and the methods are many. It could be as simple as fudging accounts, or creating a new business. Companies also create, or already have, holding companies with the same or a similar name. The holding companies do not trade and therefore have a significantly lower turnover. The holding company's finances are then used falsely to qualify for an exemption. Companies also create new entities and transfer old assets into them to create a "start up", but many agencies and accountants do not check if it is a continuation of an existing business and simply issue a certificate.

Levenstein said the verification manual stated that all agencies have to conduct an on-site visit to verify the entity. But Sanas has not accredited an agency for exempt micro enterprises (EME), allowing them to bypass the site visit requirement. Often a visit to the business gives a good indication if the business is an EME. "If the business has 50 staff, there has to be a question mark around its EME status. If the business has one customer that spends R6-million a year with it, there has to be a query if it says that its turnover is less than R5-million," he said. "In one case we found that the accountant based his letter on VAT figures supplied by his client showing that his client is not only cheating on BBBEE [broad-based black economic empowerment] but also cheating on the taxman."

Qualifying small enterprise
As a qualifying small enterprise, it is far easier to gain BEE status by producing a generic scorecard. Companies that can show a turnover of less than R35-million, depending on the sector, can use this scorecard. "Some companies could earn two tothree times more points this way," Levenstein said. "It's a lot more difficult to catch out." A company with a turnover of R50-million could be split into two businesses with a turnover of R25-million each. "In some cases it is justified," Levenstein said.

Sector codes
Sector code fronting refers to companies and verification agencies producing a certificate based on the wrong set of codes. Levenstein said the fault usually lies with an agency that accepts the work but does not have the required accreditation for the sector that the client belongs to. "Ironically the agency will deny any wrongdoing, but quickly get his accreditation and from then on will verify his clients using the correct sector codes." The average company would not know that the verification agency cannot verify them. But in some cases it is done deliberately and the company "plays the ignorant card".

Forged certificates
Companies still forge certificates for BEE compliance, Levenstein said. "It's more common than we realise. A certificate is commonly forged off a valid one produced by a verification agency. Then the VAT number or the company name will be changed."It's incredibly difficult to discover," Levenstein said. "You would need to pick up differences in the PDF or in the company names." If a forged certificate is in no way connected to the department of trade and industry or Sanas, and has not broken a Sanas regulation not much can be done other than to deem the certificate invalid.