B-BBEE and the problem of trusts

Snake Oil B-BBEE Salesmen

By Keith Levenstein, CEO EconoBEE, a BEE advisory firm

One of our prospective clients had an unexpected visit from a consultant from an unknown company who said he could guarantee them a level 6 (if not 5) within the new codes, with little to no effort.

This consultant proposed a Broad-Based Ownership Scheme (a trust holding between 27 – 51% of the business). He said that the current shareholders would not lose any voting rights nor power. He added that the beneficiaries of the trust would not be able to take control of the business and that the current shareholders would hold their equity worth in the business.

Further, he requested a five 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 the company’s books as Enterprise Development. This loan would then be used each year as the amount spent on Enterprise Development, and after five years repay the company the capital.

He further indicated that on the company’s previous score they should have gained points on the Employment Equity and can again for the new scorecard, because they employ more than 50% black employees. He stated than an organigram for B-BEEE purposes could be drawn up to indicate the level of junior management etc, and this does not constitute actual management levels, as the company doesn’t operate on such a multilevel management operation.

The above sounds too good to be true, and as the saying goes, if it is too good to be true it is probably not true, and this is the case here.

The proposition indicates the fronting that this consultant is planning “an organigram for BBBEE purposes”.  If the company were to follow the consultant’s advice they could never say they were unaware that the consultant was proposing a fronting scheme.

Selling shares that carry 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 their 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.

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 do not represent ownership in any respect. Almost every agency/auditor will happily accept the word of the snake oil salesman as 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 being coerced into signing documents with the promise of a bursary. The person of course never gets to exercise their vote or receive any value for the shares they own because the person never owns the 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 and a level, taking them to a non-compliant status. Not all trusts are wrong, though the majority are. These schemes can be fixed so as to 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 another structure where it is impossible to identify an actual black natural person holding rights of ownership, there is no ownership and points cannot be earned or 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.