Only resolute due diligence erodes fronting

Posted On Monday, 12 July 2004 02:00 Published by
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Fronting in its various forms is a blight on endeavours to implement legitimate programmes for which the government holds a valid political mandate.

By Bert Chanetsa

Fronting in its various forms is a blight on endeavours to implement legitimate programmes for which the government holds a valid political mandate.

While it may not be possible to eradicate fronting because of ingenuity or complicity between interested parties, it can certainly be discouraged.

Transformation of the economic demographics of South Africa is one of the government's critical delivery areas. An enabling environment has been created for black economic empowerment with the introduction of various guidelines.

Economic sectors have formulated, or are in the process of formulating, charters to demonstrate their commitment to transformation. Of course, there is debate about whether charters will advance genuine transformation or simply provide another forum to engineer the retention of the status quo.

The jury is still out on this one.

The chicanery that was recently uncovered in the eThekwini municipality's uShaka contracts is probably the tip of the iceberg. The companies involved were able to get away with their deception at the time that the contracts were adjudicated, and it came to light only after the fact.

Disclosure of or an admission to fronting often follows a fallout between the historically advantaged party and historically disadvantaged party.

As an example, a fallout can arise in the situation where promoters, on paper, take the liberty of populating the shareholding of a special purpose vehicle formed specifically for the pursuit of government tenders with its unsighted black employees.

One can imagine that the employees will certainly kick up a fuss when they learn that their details were used, without their knowledge, for somebody else's benefit.

In some instances, the historically advantaged party and its historically disadvantaged partner actively conspire to conceal the true nature of their relationship from the authorities or interested parties, particularly tender adjudicators . Here again, the deception is likely to go undetected as long as the historically disadvantaged party does not feel hard done by.

Then there is the area of fancy corporate footwork, where the true nature of the relationship between the parties is lost behind company structures and sophisticated corporate instruments with technical provisions attaching to variations of equity and quasi-equity.

There is also the dubious use of nominees, whose sole purpose in many instances is to improperly conceal the identity of the beneficial holder of shares. Historically disadvantaged parties have been known to act as nominees for their historically advantaged partners.

The attitude of parties in fronting has many of the same characteristics as those seeking to evade tax or to avoid paying tax. Evasion is banal and difficult to defend once exposed.

Avoidance is where skilled minds are exercised to convey the appearance of compliance. Avoidance comes under scrutiny only when a watchdog has reason to believe that a certain empowerment structure is one that would not normally be employed for bona fide business purposes, other than for winning a tender or scoring empowerment points. Exposing fronting where a particular "arrangement" has been structured is difficult.

It is important that the government succeeds and is seen to succeed in its efforts to bring about transformation.

This means in part that there should be a more serious attitude to due diligence both in the formative and operative stages of a partnership between historically advantaged and disadvantaged parties. There needs to be monitoring, backed up with sanctions and penalties if need be.

It's clear that self-regulation in the area does not work.

Bert Chanetsa is the chairman of Decathlon Continental, an investment banking advisory concern, and is a director of Chanetsa Incorporated

Publisher: Business Report
Source: Business Report

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