Material Changes to the New BEE Act

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Caryn-Leclercq

The Department of Trade and Industry has introduced a Broad-Based Black Economic Empowerment Amendment Act, 2013 (‘the BEE Amendment Act’), which fundamentally amends the Broad-Based Black Economic Empowerment Act, 2003 (‘the Principal BEE Act’).  It has also introduced revised ‘generic’ BEE Codes of Good Practice (‘the Amended BEE Codes’), which amend and replace the ‘generic’ BEE Codes of Good Practice issued in 2007 (‘the 2007 BEE Codes’) with effect from 1 May 2015.

This means that enterprises (and their directors) should have BEE, and the changes being effected by the BEE Amendment Act and the Amended BEE Codes, firmly in their focus at this time.  Appreciating these changes, and comparing the BEE Amendment Act and the Amended BEE Codes with the Principal BEE Act and the 2007 BEE Codes, can be a daunting task.  To assist in this process, we highlight below certain of the changes being effected, which are expected to materially affect the overall BEE score a business can achieve, the BEE verification and rating process and the monitoring and enforcement of BEE legislation.

Introduction of Non-Compliance and Circumvention Criminal Sanctions

The Department of Trade and Industry has completely changed its stance in regard to the monitoring of BEE and the enforcement of the BEE legislation, by introducing a number of new criminal offenses.

This is a significant departure from previous Government policy. Neither the Principal BEE Act nor the 2007 BEE Codes prescribe any criminal or civil penalties or sanctions for non-compliance or circumvention.  This legislation has been enforced in practice largely through the Preferential Procurement element (which essentially measures the extent to which one enterprise, in the course of acquiring goods and services from other enterprises, favours BEE-compliant enterprises).  All government organs and public entities are required to apply the BEE Codes in the issuing of licences, concessions and other authorisations and in implementing their Preferential Procurement policies. As the Government requires BEE compliance from its licensees and suppliers, so too do the Government’s licensees and suppliers then expect compliance from their suppliers in order to score the maximum points for their Preferential Procurement elements, and so on.  A chain of compliance is consequently created.

It is this chain that has, to-date, largely created the business imperative for compliance.  However, the Department of Trade and Industry, as a significant departure from previous Government policy, has now introduced a number of criminal offenses (amongst others) involving misrepresenting the BEE status of an enterprise, the provision of false information to a verification professional or any organ of state or public entity and engaging in a ‘fronting activity’.

A ‘fronting practice is a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the BEE Act or the implementation of any of the provisions of the BEE Act, including but not limited to practices in connection with a BEE initiative:

  • in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;
  • in terms of which the economic benefits received as a result of the broad-based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;
  • involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or
  • involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which:

(i)       there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;

(ii)   the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;

(iii) the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.

The failure by a BEE verification professional, a procurement officer, an organ of state or a public entity to report any of the prescribed offenses of which it becomes aware to the appropriate law enforcement agency also constitutes an offence.

The penalties that can be imposed on an enterprise for a criminal offence include imprisonment for a period up to 10 years, a fine of up to 10% of its turnover, or both.  Any person convicted under the BEE Amendment Act may not, for a period of 10 years from the date of conviction, contract or transact any business with any organ of state or public entity.

The BEE Amendment Act also makes it clear that persons who engage in fraudulent practices to enhance their BEE status may be charged with common law crimes such as fraud.

It is important to note, though, neither the BEE Amended Act nor the  Amended BEE Codes impose a strict obligation upon any enterprise to achieve certain BEE targets.  It is not an offence to fail to achieve a certain level of BEE compliance – some misrepresentation or deception is required for an offence to be constituted.  The decision of an enterprise as to the level of compliance it wishes to achieve for each BEE element, and its rate of transformation, will be continue to be driven by business imperative mentioned above and by the addition of the Priority Elements into the Amended BEE Codes (see below).

The addition of these offences (with additional risk for the enterprise (and its directors) as well as for the verification professional concerned) means that the enterprises may be subject to deeper scrutiny during the verification and rating process. Enterprises would therefore be wise to (if they have not already) have their BEE transactions and initiatives scrutinised by internal or external advisors, prior to the submission of documentation for their 2015 verification and rating process.

Revised Manner of Calculation of BEE Status

The Amended BEE Codes significantly changes the calculation of an enterprises BEE status, as follows:

BEE Status 2007 BEE Codes Amended Codes
Level One Contributor   (135% Procurement Recognition) ≥ 100 points ≥ 100 points
Level Two Contributor   (125% Procurement Recognition) ≥ 85 points but < 100 points ≥ 95 points but < 100 points
Level Three Contributor   (110% Procurement Recognition) ≥ 75 but < 85 points ≥ 90 but < 85 points
Level Four Contributor   (100% Procurement Recognition) ≥ 65 but < 75 point ≥ 80 but < 90 points
Level Five Contributor   (80% Procurement Recognition) ≥ 55 but < 65 points ≥ 75 but < 80 points
Level Six Contributor   (60% Procurement Recognition) ≥ 45 but < 55 points ≥ 70 but < 75 points
Level Seven Contributor   (50% Procurement Recognition) ≥ 40 but < 45 points ≥ 55 but < 70 points
Level Eight Contributor   (10% Procurement Recognition) ≥ 30 but < 40 points ≥ 40 but < 55 points
Non Compliant Contributor                 (0% Procurement Recognition) < 30 points < 40 points

This seemingly simple change could result in an enterprise suffering an automatic downgrade in its BEE status when the Amended Codes take full effect, if it has not yet taken steps to increase its points, to maintain its current rating.  For example, an enterprise with a BEE score of 65, being a Level 4 contributor and having a 100% procurement recognition level, could find itself at Level 7 from 1 May 2017.  This could effect contractual relationships, for example, where the procurer of the enterprises supplies contractually requires it to maintain a Level 4 BEE status, as well as affect the status of its licences and consent from Government or public entities.

Reduction of Number of BEE Elements and New Point Weightings

The 2007 Codes utilise seven BEE elements for the measurement of an enterprise’s BEE status, being Ownership, Management Control, Employment Equity, Skills Development, Preferential Procurement, Enterprise Development and Socio-Economic Development.

In the Amended Codes, Preferential Procurement and Enterprise Development have been collapsed into one BEE element, as have Management Control and Employment Equity.  The weighting of the five elements (as compared with the 2007 Codes) are as follows:

ELEMENT WEIGHTING WEIGHTING UNDER 2007 CODES WEIGHTING UNDER AMENDED CODES
Ownership 20 points plus 3 bonus points 25 points
Management Control (including Employment Equity) 10 points for Management Control 15 points for Employment Equity  15 points plus 4 bonus points
Skills Development 15 points 20 plus 5 bonus points
Enterprise and Supplier Development (formerly Preferential Procurement and Enterprise Development) 20 points for Preferential Procurement15 points for Enterprise Development 40 points plus 2 bonus points
Socio-Economic Development 5 points 5 points
Total 107 118

 

Introduction of Priority Elements

In terms of the 2007 Codes, enterprises were not technically obliged to achieve a score for each element and technically were free to choose to achieve a particular BEE status and BEE procurement recognition level without scoring any points for particular elements.  This freedom has been severely curtailed by the Amended Codes.

The Amended Codes introduce the concept of ‘Priority Elements’ and sub-minimum requirements.  The Amended Codes designate Ownership, Skills Development and Enterprise and Supplier Developmentas Priority Elements.  This means that large enterprises (enterprises other than EMEs and QSE’s) are expected to comply with the all the following minimum requirements:

  • 40% of Net Value (meaning 40% of the 8 points based on a time based graduation factor)
  • 40% of the total weighting points for Skills Development
  • 40% of each of the 3 categories, within the Enterprise and Supplier Development elements, namely preferential procurement, supplier development and enterprise development

Non-compliance with the Priority Elements will result in the enterprise’s BEE status being discounted by one level until the next verification period in which the enterprise can demonstrate compliance with the 40% sub-minimum requirements.  The discount will apply, irrespective of the reason for the failure to comply.

Position of Exempt Micro-Enterprises and Qualifying Small Enterprises

Under the 2007 BEE Codes, enterprises which have an annual total revenue of R5 million or less qualify as EMEs (which get an automatic status of Level Four Contributor).  Start-up enterprises are measured as EMEs for their first year of formation or incorporation.  Any enterprise which has an annual total revenue of between R5 million and R35 million will be considered to be a QSE.

Under the Amended BEE Codes, the threshold for QSE’s will be increased to having an annual total revenue of between R10 million and R50 million is considered to be a Qualifying Small Enterprise (“QSE”).

Under the 2007 BEE Codes, a QSE was able to select any our, rather than the seven, BEE elements to be scored on.  This benefit will fall away on 1 May 2007 and a QSE will be obliged to be rated on all the five BEE elements when determining its BEE status.  Under the Amended BEE Codes, the BEE status of a QSE will discounted by one level if it does not comply with Ownership (as a compulsory Priority Element) and either one of Skills Development or Enterprise and Supplier Development.  The BEE regime will be significantly more onerous for QSE’s which are not 100% or 51% black-owned.

Caryn Leclercq

Caryn has a BA and LLB from Stellenbosch and was admitted as an attorney in 1998 after having completed her articles at Bowman Gilfillan. At Bowmans, she rose to the level of director in the corporate commercial department where she specialised in M&A work, before moving to Werksmans in 2005. At Werksmans, Caryn worked as a director in its corporate commercial department specialising in M&A and banking and finance work. Caryn left Werksmans and joined Caveat Legal in 2012.

(c) Copyright Caryn Leclercq 2015