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The Year of Proper Empowerment Beckons

With the ANC's Mangaung Conference behind us and the public consultation process on the BEE Codes concluded - This year will see the adoption of the new BBBEE Act and the real challenges of its implementation will begin.

Private sector corruption is South Africa's best kept secret. Neither during apartheid nor post -1994 is private sector corruption routinely exposed by journalistsThere is little substantive research of such corruption which means an accurate figure of its cost to the economy is available.

There are some exceptions though including major cases such as the Fidentia and Auction Alliance. Carte Blance regularly exposes corruption in the white business world. In May 2012 the Star newspaper investigated a case of fraud in a BEE transaction. A director of a medical supply company listed her domestic worker as a 40% shareholder of her company without the latter's knowledge and won contracts worth R160 million. Needless to say the worker was not treated as a shareholder nor compensated accordingly. Regulatory bodies such as the Competition Commission investigate companies as in the bread price fixing scandal or through criminal or civil actions by competitors.

Nowhere are unethical practices in the private sector more prevalent than in Black Economic Empowerment transactions. The case exposed by the Star is a very crude example.

Most Black people or companies that I have come across fall victim to a marginally more sophisticated form of fraud. With some variants the following happens: The white company approaches the BEE company or individuals and suggests setting up a joint venture company (the BEE entity) to boost its BEE status and thus increase opportunities for obtaining public sector work.

In the course of setting up the BEE entity, the white shareholders' attorneys draft all the legal documentation. The African partners have no independent legal advice, either because they do not have the money or because they trust their white partners. The agreements are usually drafted in favour of the white company. Sometimes the legal documentation is the size of a book and BEE partners are pressured to sign without the opportunity to read through them thoroughly. Where they do read through them and have objections these are often overridden. Because there is money to be made the black business people sometimes give up insisting on their rights.

The company is set up. Once work is obtained, either the original white company becomes the project manager with or without notice to the BEE company. In many instances, a whole group of related companies are set up through which profits are siphoned off through supply, rental and other contracts with the BEE entity. This effectively drains the BEE entity of profits. Often these companies are owned and managed by relatives or friends of the white shareholders.

The BEE shareholders are excluded from effective decision making. Accountants are used to manipulate financial statements. If the BEE shareholders ask for information, they are either given non-material info or ignored. In certain instances if they persist with questions they are unilaterally removed as directors or their shareholding is tampered with. Under the 1973 Companies this was possible. It's more difficult under new Companies Act. In some cases the BEE entity is turned into a shell with no value and a new one is formed perhaps with a new set of black shareholders.

From anecdotal evidence these practices are widespread. This begs the question as to who the real beneficiaries of BEE are. What would be interesting would be research into money made from government by white professionals and business people and their black counterparts respectively since 1994.

In instances where there has been fraud or unethical practices, redress is very difficult. Where there is a written agreement signed by the Black shareholders, it is usually difficult to extricate them from it. Even where there has been a breach, it's expensive to institute legal proceedings especially since the white company with more resources can simply drag the matter out for a long time.

The reason these practices are so widespread is that there are no penalties for this type of conduct except a long drawn out civil case. This leads to a lack of accountability. I have heard of rare cases where Black business people are threatened with physical harm if they proceed to try and get redress.

An expeditious and cost effective legal framework that could curb these abuses is at present not available to those aggrieved. So the offenders become repeat offenders and very rich. What keeps them in business is the naiveté, greed and willingness on part of some African business people to be used as fronts.

The Broad Based Black Economic Empowerment Act no 53 of 2003 was designed to establish certain parameters within which the policy of BBBEE would operate.

The BBBEE Amendment Bill was issued for comment by the Minister of Trade and Industry, Rob Davies in November 2011. If passed in its current form, it would have a far reaching positive impact on how business is conducted.

The Bill outlaws fronting and makes it a criminal offence. It defines fronting as follows:

"Fronting B-BBEE Practice" means a transaction, arrangement 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 BBBEE transaction-"

It gives some examples such as Black members of company not being allowed to participate in its activities not participate in its economic benefits. This definition though not exhaustive, is sufficiently comprehensive to cover most of the practices complained of.

The most significant amendment is that these practices now carry a criminal sanction. In instances where false information is provided regarding the BBBEE status of a company to a verification agency or to any organ of state or public entity, such entity and its personnel will be guilty of an offence.

This is a major breakthrough. The penalties are steep. Anyone found guilty of these offences can be fined or imprisoned for not longer than 10 years or both. Where it is a company the fine can be up to 10% of annual turnover.

In addition any person involved in verification or an official of state who knows of fronting and fails to report it can be fined or imprisoned for a period of not more than a year or both. Contract can be cancelled and convicted persons are banned from doing business with the state.

Another important amendment is the setting up of the setting up of a BBBEE Commisssion which can investigate any complaints either on its own initiative or on receipt of complaint. The BEE regulatory landscape is about to change and the result will be a more transparent, ethical business environment.

Christine Qunta is the executive chairperson of Pholosang BEE Resolution Services(Pty) Ltd.