Binance may have misled US lawmakers about its business dealings and relationship with its local unit in a letter sent in March, according to reported Bloomberg on June 8.
In a letter sent to the United States Attorney General, Merrick Garland, Senators Elizabeth Warren and Chris Van Hollen have called on the Justice Department to investigate whether Binance made a false statement to Congress earlier this year. In a lawsuit filed on June 5, the Securities and Exchange Commission alleged that Binance’s global entity and the US unit were mixed up.
Today we charged Binance Holdings Ltd. (Binance); US-based affiliate, BAM Trading Services Inc., which, together with Binance, operates https://t.co/swcxioZKVP; and their founder, Changpeng Zhao, with a variety of securities law violations. pic.twitter.com/IWTb7Et86H
— US Securities and Exchange Commission (@SECGov) June 5, 2023
Today we have charged Binance Holdings Ltd. (Binance) (Binance); US-based subsidiary BAM Trading Services Inc, which, along with Binance, it operates and its founder, Changpeng Zhao, for various securities law violations.
In March, three US senators led by Warren sent a letter to Binance CEO Changpeng “CZ” Zhao and Binance.US CEO Brian Shroder questioning the exchange’s operations and requesting their balance sheets. At that moment, the senators alleged that Binance and its US branch were attempting to circumvent local regulators, avoid sanctions, and facilitate money laundering.
Nearly three weeks later, Binance Chief Strategy Officer Patrick Hillman sent the requested documents to Congress along with a 14-page letter delving into the exchange’s compliance record, acknowledging past mistakes and stating that the firm has built strong Know Your Customer and Anti-Money Laundering policies in recent years.
Why is the independence of Binance.US important?
Binance.US’s independence from its global unit is critical for two reasons — regulatory jurisdiction and liability in case of failure — Syracuse University law professor Jack Graves told Cointelegraph.
“If you don’t keep them independent, then US regulators will go after Binance International and say we have jurisdiction because you’re acting through the US entity. And in fact, I think the SEC is looking at it,” Graves said.
The second relevant aspect lies in the possibility of Binance.US going bankrupt. Graves pointed out that there is a basic principle that a company, and not its owners, is responsible for its debts. “So, As long as Binance.US is fully independent and ends up in bankruptcy, Binance International is not obligated to pay Binance.US’s debts.”
If the companies were mixing funds, the owners, which is the global unit of Binance, would be liable in the event of bankruptcy. “This is why the corporate veil, in effect, provides limited liability for owners. And a parent company, like Binance International, is like any other owner: it’s protected. It is protected from liability as long as those companies are truly independent.”Graves continued, explaining that there may be exceptions.
On June 5, the companies separately responded to the SEC’s complaint. Binance’s global unit claimed that it had “actively cooperated with SEC investigations and […] worked hard to answer your questions and address your concerns.” The exchange also said: “While we take the SEC allegations seriously, they should not be the subject of SEC enforcement action, let alone on an urgent basis.” .
Binance.US tweeted that the SEC’s allegations are its “latest example of regulation for compliance.” The lawsuit “is without merit, and we intend to vigorously defend ourselves,” she continued.
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