Money Order Firm’s Failure Ruins the Poor

In the world of billion-dollar financial collapses, the state seizure of an obscure Southern California money order company last December attracted scant public attention because it involved a mere $3.2-million shortage.

But the demise of General Money Order Co. has left in debt an estimated 100,000 people, most of them poor Latino immigrants or African-Americans who had unwittingly used the worthless paper to pay everything from rent to immigration fees.

A Lomita public housing tenant with five children had to scrape together an additional $50 a month for three months to reimburse Los Angeles County for rent she paid with a money order that bounced.

A Pacoima nursing home assistant had to come up with $300 in two days after she received an anguished letter from her 75-year-old father, saying he was in jail in Costa Rica because he had cashed money orders from her.

A Pasadena gardener lost $4,000 in savings he had sent to buy an orange grove in El Salvador, where he dreamed of raising his family someday. But he was one of the lucky ones--he received a partial refund.

“It was a real tragedy that took place and no one seemed to notice,” said Luke E. Williams Jr., an attorney working for El Rescate Legal Services, which provides free legal help to Central American refugees.

Money order companies and their sales agents--the neighborhood grocery, liquor and check-cashing stores--have become banks for the poor, handling transactions totaling at least $45 million a day in California and more than $250 million nationwide.

But they are far from secure because they are subject to few regulations and their customers are not protected by the federal deposit insurance enjoyed by banking customers. General Money Order, with sales of $60 million a month, was the second such company to fail in California in 1991--and at least the fourth during the past five years.

“That was always the type of money order that we bought--it was the agency that was closest and we thought this company was more reliable,” Pedro, the Pasadena gardener, said in Spanish, asking that his last name not be used because he is an illegal immigrant. “It was not as we thought.”

General Money Order appears to have failed because of a combination of inadequate state regulations, inaccurate company bookkeeping and skimming by some of the company’s 1,439 sales agents, according to preliminary investigations by a state-appointed receiver and the California Department of Corporations, which licenses money order companies.

The chain of money order transactions begins with the agents who sell the vouchers to the public in return for a small fee. Part of the fee and the remainder of the proceeds are sent to the money order company, which deposits the money in a bank account. The bank then reimburses merchants who have accepted the money orders from patrons.

On Dec. 17, General Money Order owner Jay Sun Hwang contacted the Department of Corporations to report that something had gone wrong: He was short $3.2 million and could not pay off his outstanding money orders. Later that day, the department shut down the company and seized its assets.

Hwang could not be reached for comment, but his attorney blamed company managers who he said hid the fact that some agents had not been turning over their proceeds.

Attorney Kenneth A. Freedman said he did not know whether Hwang would take legal action against the employees--whom he declined to identify--because they were trying to find ways to collect the debts themselves.

What happened probably will not be known until the receiver sorts through the reimbursement claims, which arrive daily in giant postal carts at the Westwood office of attorney David L. Ray. So far, more than 50,000 claims have been filed. Attorneys estimate that they will have at least twice that many by the April 30 deadline.

The claims tend to be for less than $110, but that is a significant sum for people who make the minimum wage or less. Although history indicates the money order holders might receive close to a full refund, they will not get it for months, if not years. By then, the experience in other states indicates, many victims will have disappeared.

General Money Order’s failure could not have come at a more critical time--mid-December, when people were saving for Christmas or sending extra money home to their families. It also happened within days of deadlines for property taxes and immigration payments.

Scores of public and private agencies began grappling for ways to extract repayment from the poor:

* The U. S. Immigration and Naturalization Service received at least $140,000 in worthless money orders from immigrants who are at risk of losing their temporary resident status if they do not promptly repay the renewal fees.

* The Los Angeles County court trustee, which collects child support payments, received at least $17,800 in money orders from the closed company. They are being treated as bounced checks, except that the $10 bad-check penalty is being waived.

* The California Public Utilities Commission ordered all utilities to accept the money orders. Mayor Tom Bradley negotiated the same arrangement with the Department of Water and Power, which received almost $100,000 in payments by way of General Money Order.

* The county Housing Authority received $40,000 money orders for rent payments. The money must be repaid before the end of April. Many renters of private housing received eviction notices from their landlords, but it is not known whether any were evicted.

The bulk of money orders are sold by the U. S. Postal Service and Greyhound’s Traveler’s Express Co., which offer a fair margin of security because the companies have substantial assets.

But the poor are more likely to frequent the smaller establishments in their neighborhoods--and those are most likely to fail.

In a ritual repeated thousands of times every day across the country, customers exchange their payroll or welfare checks for money orders, then use the vouchers like personal checks to pay bills. Some are illegal immigrants who cannot open bank accounts because they lack Social Security numbers. Others do not trust themselves with a checking account that can be overdrawn.

Money orders also are a convenient means of sending money to family members in other countries. One of the largest claims against General Money Order--about $150,000--is from Espirito Santo Bank of Florida, which is representing financial institutions in El Salvador, Belize and Jamaica that cashed the money orders.

In Latin America, dozens of people who cashed the money orders that bounced told relatives in the United States that their banks had threatened them with fines or arrest if the funds were not repaid with interest.

Sonia Ortega, whose father was arrested in Costa Rica, said she persuaded authorities there to release him after 12 days by sending cash to cover the bounced money orders.

But Maria Diega Amaya, a Los Angeles resident who makes $80 a week baby-sitting, does not have enough money to reimburse a bank in El Salvador that is threatening to file charges against her mother if she does not repay $440 plus 20% interest. Amaya said her mother spent the money on expenses for herself and Amaya’s 5-year-old daughter, who lives with her.

“I sent her a note saying I couldn’t do anything,” Amaya said in Spanish, sobbing. “I am worried about her if she goes to jail--she has a bad heart. . . . And who would take care of my daughter?”

After General Money Order closed, some money order clients switched to cash transactions or started buying money orders from the larger distributors. Within weeks, however, they began returning to their local convenience stores, where the money orders are cheaper--at 25 to 60 cents, less than half the price at some larger outlets.

After her rent payment bounced, Theresa Downs had to forgo buying her five children basic clothing items such as socks and T-shirts so she could reimburse the county housing authority. Yet she said she probably will continue to use her neighborhood money order outlet.

General Money Order, licensed by the Department of Corporations in 1983, established the majority of its sales outlets in Los Angeles County primarily in Central, South-Central and East Los Angeles--although some outlets were located in Fresno, San Bernardino and San Diego. There were 192 agents in Orange County.

Members of the Korean-American community say General Money Order owner Hwang, a resident of South Pasadena, has served as chairman of the local Korean Community Assn. and once considered a run for the Korean legislature.

The Department of Corporations and the receiver say they have not ruled out the possibility of embezzlement by Hwang or General Money Order employees. Investigators said they believe that the company had developed funding shortages over the past several years, even though financial reports to the state never indicated such problems.

The company has filed at least 30 suits since 1983 against agents who had allegedly failed to turn over cash collected from money order sales, according to Superior Court records. The losses for cases filed in 1991 exceeded $250,000.

Attorney Peter A. Davidson, whose law office is the state-appointed receiver, said his investigation suggests that General Money Order may have hidden its losses over the years to retain its license. By law, a money order company must have enough cash on hand to pay off all of its outstanding money orders.

The state did not detect the problem, officials said, because regulators rely on company records for quarterly reviews and only conduct an on-site audit every year or two.

“Unless we go in there every day, we cannot ensure the safety of these companies,” said Thomas Sayles, Department of Corporations commissioner. “But the state can’t afford to park someone there.”

Another Los Angeles-based company, Pan American Money Order, was shut down last July after state auditors uncovered what they called a bookkeeping “mess.” Up to $2 million in money orders still have not been reimbursed.

The other two recent seizures in California were United Express Money Order Co., based in Long Beach, which the Department of Corporations closed in October, 1989, and American Security Financial Group of Los Angeles, closed in 1987 by the state Department of Banking, which generally licenses the larger money order companies.

Money order companies governed by the Department of Corporations are required to post fidelity bonds based on the volume of their sales--a $2-million bond in the case of General Money Order--but that money is only accessible if intentional wrongdoing by the company or its employees can be proved.

The two failures within a year have prompted a proposal for a state bailout fund, which would be supported by the money order float: the interest earned by the company before the money order is redeemed. The proposal would apply to the two remaining money order companies licensed by the Department of Corporations--Continental Express Money Order Co. and Navicert Financial Inc.

Advocates for the poor maintain that it should not have taken another major and embarrassing failure to spark regulatory change in the money order industry.

“After it happened once, regulators should have been alerted to the problem,” said attorney Williams at El Rescate. “But the attitude is that these are a lot of immigrants here. These are people who are not empowered . . .(they don’t) know to call government officials to get things done.”

Money order companies have failed in many states, including Michigan, Florida and Nevada. But a flurry of new regulations governing such companies were enacted after Northwest Financial Express Inc. declared bankruptcy in 1986, leaving about $12 million in unpaid money orders in 13 states and Puerto Rico.

After losing his savings in the General Money Order collapse, Pedro, the Pasadena gardener, returned day after day to the store where he had purchased the money order. Out of pity, the agent refunded all but about $400 of his money.

However well-meaning, the agent--and hundreds of others who used money order proceeds to make refunds--may have violated state law, according state investigators and the receiver.

State law prohibits agents from issuing refunds after a company has been shut down and requires them to immediately surrender all money order proceeds to a receiver.

As the agents tell it, they were placed in an unenviable position, with General Money Order customers demanding their money.

“We had people coming in who were being evicted, their cars were being repossessed, or they were threatening us,” said Richard Saunders, who estimated that he refunded about $40,000 from two storefront check-cashing outlets in the Harbor area. “We were just trying to satisfy our customers.”

Times reference librarian Greg Rice contributed to this story.