Dear Client, the below article by Keith Levenstein reflects of what is also happened to one of our previous clients, and the tragedy is that they have bought into it.
Scheming schemes by Keith Levenstein
We pride ourselves on helping our clients get the best BEE score, in the best possible way, making perfect business sense in the most economical way.
We know the BEE codes and the right strategies to adopt. We also understand the risks associated with BEE. We do not want our clients to break the law because it's wrong, and a client that goes to jail is unable to pay us!
This is a very real risk. The Amended B-BBEE Act makes it an offense for an entity to knowingly and deliberately misrepresent their BEE status. It goes further and defines "knowingly" as OUGHT to have known, or been in a position where a person, eg the CEO would have known. The maximum penalties for fronting is 10 years in jail and up to 10% of turnover. Getting the wrong advice from a consultant is not going to absolve the CEO from his duties in terms of the Act.
For example we received the following email from a company asking our advice:
"Today we had an unexpected visit from a consultant from an unknown company, who thinks he can guarantee us a level 6 (if not 5) within the new codes, with little to no effort. I wish to lay it by you and to give us in broad your opinion.
- He proposed a Broad Based Ownership Scheme (Trust holding between 27 – 51% of our business). He is confident in that the current Shareholders will not lose any voting rights nor power! He is also confident in that the beneficiaries of such a trust will not be able to take control of our business and that the current shareholders will hold their Equity Worth in our business.
- Further he requested a 5 year non-interest bearing loan (Bearing in mind that his company is a “Broad Based Black Ownership” company with level 4/3 rating), with a capital guarantee, to be shown on our books as Enterprise Development. This loan will then be used each year as the amount spent on Enterprise Development, and after 5 years repay us the capital.
- He further more indicated that on our previous score we should have gained points on the Employment Equity and can again, as we employ more than 50% black employees. He states than an organogram for BBEEE purposes could be drawn up to indicate level of junior management etc, and this does not constitute actual Management levels, as we don’t operate on such a multilevel management operation. "
The above sounds too good to be true for many companies. As the saying goes, if it is too good to be true it is probably not true, as it is in this case.
Reading point 3 clearly indicates the fronting that this consultant is planning "an organigram for BBBEE purposes". If this company were to follow the consultant's advice they could never say they were unaware that the consultant was proposing a fronting scheme.
Points 1 and 2 are even worse, but slightly more confusing: Selling shares that carrying voting rights and economic interest cannot be said to ensure the company does not lose voting rights or control. It is blatantly fronting. The consultant is guaranteeing that the existing shareholders will not lose the equity while selling 27% to 51% of their company. Impossible!
This is not an isolated consultant. This happens often, and yes, many companies have got away with it. So far.
We understand this clearly. This is the classic problem of trusts. Unfortunately far too many consultants are enticing companies with schemes of this nature. The verification industry has traditionally turned a blind eye to trusts. They rely on the (biased) opinion of the consultant drawing up the scheme as being in line with the codes. If auditors/verification agencies were to investigate the terms of the trusts including broad-based and employee ownership schemes they would soon see that these are schemes that scheme, but do not represent ownership in any respect. Almost every agency/auditor will happily accept the word of the snake oil salesman as himself being a "competent" person, award points and recognise black ownership when none exists.
We even see companies boasting in the media of their new found black owned status, when the only benefit the black person has is he is coerced into signing documents with the promise of a bursary. He of course never gets to exercise his vote, or receive any value for the shares he owns, because he never owns those shares. Yet agencies/auditors regulated by IRBA and SANAS merrily and routinely award points and recognise black ownership.
This is going to change.
When that happens, we would not want our clients to be in the position of suddenly losing 25% or 51% black ownership on their certificate as well as 25 points plus a level, taking them to a non-compliant status. Not all trusts are wrong, though the majority are! We know how to fix up the schemes so they represent true ownership that will earn true sustainable points.
The B-BBEE codes are quite clear: Key principles of ownership help explain this;
Key principle 3.3.1 states: "As a general principle, when measuring rights of Ownership of any category of Black People in a Measured Entity, only rights held by natural persons are relevant". It continues and the final sentence is "This principle applies across every tier of Ownership until that chain ends with a Black person holding rights of Ownership". If the Ownership is held a by trust, or other structure that is impossible to identify an actual black natural person holding rights of Ownership, there is no Ownership and points cannot be earned of ownership recognised.
If your scheme cannot prove that an actual black person has full voting rights AND full rights of ownership, including dividends or similar returns AND the right to the capital value of the shares owned, your scheme is going to fall foul of the Act.
Talk to us before the BEE Commissioner starts investigating, or verification agencies suddenly stop awarding points that you may have become accustomed to over the past 5 years!