In Honduras, Libertarians and Legal Claims Threaten to Bankrupt a Nation

ROATÁN, Honduras—Years later, Luisa Connor and Vanessa Cárdenas would look back ruefully on the day foreigners visited their beachfront village with plans for a development next door. They had no idea the effort was backed by Silicon Valley billionaires who wanted to build a “startup city,” or that a relatively new Honduran law would allow them to establish this semi-autonomous enclave. They could not foresee they would lead a fight against it that would launch their village into national politics and prompt an international legal dispute, threatening to bankrupt the country. They thought it was just another hotel.

Crawfish Rock is a fishing village of a few hundred people on the island of Roatán. It is the kind of place where children roam free, scouring the forest for iguanas or catching crabs under the Caribbean’s glassy waters.

It is also the site of Próspera ZEDE, a libertarian experiment in market-driven governance whose backers are suing Honduras for up to $10.775 billion. Prospera’s Delaware-based creator, Honduras Próspera Inc., argues its project has a right to continue operating even though the law that enabled it was repealed two years ago, and that it should retain that right for 50 years. To make this claim, Honduras Próspera cited a trade agreement Honduras signed with the United States, where the investors are based, and an unrelated treaty with Kuwait.

Honduras Próspera’s is just one of 15 similar claims against the Honduran government, nearly all of which have been filed since February 2023. Collectively, investors who brought four of the claims are seeking up to $12.3 billion, nearly twice as much as Honduras’ entire public expenditures in 2022. The amount sought in the other 11 claims has not been made public. Should Honduras be ordered to pay any of those judgments, it will have no right of appeal.

How could this be?

The cases were brought under an obscure system in international law known as investor-state dispute settlement, or ISDS. Written into thousands of investment treaties and trade agreements, the system allows foreign investors to bring arbitration claims against states. While it was intended to protect investors against asset seizures or corrupt court judgments, critics say corporations now use ISDS to extract huge sums when governments tighten regulations or levy new taxes.

The cases are heard by ad-hoc tribunals of arbitrators who are generally corporate lawyers. There is no precedent and no appeal. Tribunals have issued billions of dollars in awards even in cases where corporations violated domestic laws, polluted the environment or trampled on basic human rights. 

The ISDS system has also emerged as a threat to climate action. Fossil fuel companies have begun suing governments that try to phase out coal, oil and gas. In the case of poor, climate-vulnerable nations like Honduras, multibillion-dollar claims can worsen a poverty trap.

In a cruel cycle, climate change has contributed to Honduras’ soaring debt, according to a recent United Nations report, while more debt hampers the country’s ability to spend money protecting its people from extreme weather. As a result, “significant proportions of the population have been internally displaced or displaced across international borders.”

Honduras’ ISDS saga traces back to 2009, when a military coup toppled the government, and to 2021, when the wife of the deposed president was elected to lead the country, ending 12 years of rightwing authoritarian rule. Xiomara Castro ran for office pledging to reverse and reform many of the policies of the post-coup governments, widely seen as corrupt.

After Castro delivered on these promises—repealing the so-called charter cities law that enabled Próspera, for example, and enacting a law empowering her government to renegotiate electricity contracts—foreign investors brought ISDS claims.

Supporters of this process say companies filing claims are merely enforcing the rights given to them in trade and investment treaties. But many activists campaigning to reform or abolish ISDS say Honduras’ situation, and the Próspera case in particular, highlight the system’s injustices and failures.

“There are a few cases that are so egregious that I think could potentially bring down the system,” said Ladan Mehranvar, a senior legal researcher for the Columbia Center for Sustainable Investment. She noted that key leaders of the government that enacted the charter cities law have since been convicted in U.S. federal court of running the country as a narco-state, and that the case could hobble Honduras’ finances. “I feel like this one is just one of them, because it’s so crazy.”

Dozens of Democrats in Congress have been calling on the Biden administration to intervene in the Próspera case and to remove ISDS from the trade agreement on which the claim is based.

“The ISDS system is a scam snuck into trade deals to allow large multinational corporations to bypass domestic courts and challenge legitimate public policies,” with Honduras Próspera’s claim as a prominent example, Sen. Elizabeth Warren, a Massachusetts Democrat, told Inside Climate News in a statement.

While Biden administration officials have pledged that they would not include ISDS in future agreements, they have equivocated on whether they will strip it from the United States’ more than 50 treaties and agreements already in place. They have declined to weigh in publicly on the Próspera case.

Instead, the State Department has issued statements warning that the Castro administration’s policies could discourage foreign investment, comments many read as supportive of Honduras Próspera.

“If they somehow make us pay all the money that they’re talking right now, then they’re going to break a state.”

Nicholas C. Dranias, Honduras Próspera’s general counsel, said in a written statement to Inside Climate News that the Honduran government “has committed many illegal and expropriatory acts against residents, businesses, and investors in Próspera ZEDE.” (ZEDE is the Spanish acronym for Zones for Employment and Economic Development.) 

He added that the company and its affiliates “remain willing to discuss a negotiated resolution” to its ISDS claim. “Whether the Government of Honduras is ultimately held liable for US$10.775 billion remains entirely in its own hands because it could simply honor the 50-year legal stability guarantee it made to investors in Próspera ZEDE.” 

Gerardo Torres, Honduras’ vice minister of foreign affairs, said the country cannot afford to pay what the investors are seeking—nearly two-thirds of its people live in poverty and the nation is already saddled with $16.5 billion in debt. The government has decided to fight the claims rather than negotiate, he said, speaking from a couch in his office, with Tegucigalpa’s hodgepodge development sprawling in the window behind him.

In large part, the country’s strategy relies on an argument that this isn’t just about Honduras.

“If they somehow make us pay all the money that they’re talking right now, then they’re going to break a state,” Torres said. “And then you’re going to see how private corporations can destroy states.”

A 14-Story Tower, $25,000 Gene Therapy and a Brawl

Crawfish Rock lies at the end of a largely unpaved road that terminates in the village center, within sight of the beach. Pastel wooden houses with corrugated metal roofs surround the clearing, raised high on stilts.

“Growing up in a community like Crawfish was really something desirous,” said Connor, whose first language is the Caribbean English known in Roatán as “island English.” Like many other villages in Roatán, Crawfish Rock is a community of Black Caribbean descendants.

Connor has spent her entire life here and she roams the village as if it were one large home, plucking wild almonds from trees lining the beach and mangos from an unruly orchard next to Cárdenas’ house. At a relative’s home off the village center, Connor emerged from the back with a length of sugar cane, which she peeled with a machete before chewing, then stopped to talk with her siblings, who were leaning against a blue wooden boat nearby, about to head out fishing.

“We have everything that a human needs to survive,” she said.

Connor and Cárdenas have been friends since childhood and now serve as president and vice president of the village patronato, or community council, positions they assumed when they realized that Próspera wasn’t just another tourism development.

By September 2020, villagers had learned that the project was operating under a law that allowed for a type of special economic zone known as a ZEDE. The ZEDE law drew on the ideas of Paul Romer, an American who would later serve as chief economist at the World Bank and who had been promoting the idea of charter cities as models of development. In 2011, the Honduran Congress passed a law based on Romer’s ideas, but the law was ruled unconstitutional by the country’s Supreme Court the following year. The president of the Congress at the time then used a disputed legislative maneuver to replace four judges who had ruled against the law, and lawmakers enacted a new, slightly modified version in 2013.

The law allowed private investors to create their own, largely self-governing zones, with authorities far beyond other economic zones in Honduras and around the world that offer incentives for foreign investment. ZEDEs were empowered to write their own civil laws, enact their own regulations and building codes and create their own courts. Businesses would pay taxes not to municipal or national governments but to the ZEDE, which could set its own rates. Only a small portion of the revenue collected would be passed on to the central government. 

The ZEDEs were overseen not directly by the government but by a committee appointed by Honduras’ president, and the initial members were stocked with foreigners, many American conservatives, including the son of former U.S. President Ronald Reagan and the anti-tax crusader Grover Norquist.

Próspera became the first ZEDE in December 2017, funded by a venture capital firm founded to help launch charter cities around the world. The firm, Pronomos Capital, was backed by prominent billionaires, including Peter Thiel and Marc Andreessen. Próspera began attracting biotechnology companies and other businesses by promising a “flexible and incentive-based regulatory environment designed to foster innovation while ensuring optimal levels of safety.” Companies could choose from a number of regulatory frameworks or propose their own. Próspera’s advertising promised “a favorable tax regime.” The company says it has registered more than 220 businesses, which can be established by “(e)Residents,” who do not necessarily live or work in Roatán. 

Today, not far from Crawfish Rock’s wooden houses and unpaved paths, in a country where more than half the population lives on less than $7 a day, visitors can spend $25,000 to inject themselves with a gene therapy that aims to delay aging, available only on Roatán and in Dubai. A Bitcoin center perched on a ridge overlooking the Caribbean teaches locals about the benefits of cryptocurrency and how to use it—Próspera ZEDE has adopted the digital coin as one of its currencies. Another company offers “subdermal implantation services and a variety of cybernetic upgrades,” saying: “We help people become self-sovereign cyborgs.”

About 1,000 feet from the center of Crawfish Rock, a developer has cleared a section of forested hillside in the ZEDE and erected a 14-story mixed-use tower unlike anything else on the island. The developer did not obtain permits from the local or national government for the building but instead from Próspera ZEDE, which Honduras Próspera said “is a Honduran government authority” similar to a municipality.

Perhaps most alarming for people in Crawfish Rock, the law created a process for Honduras to expropriate land on behalf of the ZEDEs through eminent domain in order to expand. Honduras has a dark history of land conflict, including the forced sale of farmers’ land to large corporations and violent attacks on those who resisted.

Honduras Próspera says its ZEDE has forbidden itself from expropriating land with a resolution it passed in August 2020, and the ZEDE has assured residents that it “will not, and cannot, legally expropriate properties to expand its boundaries.” But Connor and Cárdenas do not trust them.

As the two women began fighting Próspera and organizing against the ZEDEs, their relationship with the company grew increasingly contentious. In September 2020, as Honduras was grappling with the Covid-19 pandemic, the company’s chief executive Erick Brimen sent Cárdenas’ mother a voice message. Brimen wanted to hold a public meeting in the village, but the patronato had sent him a letter urging him not to, in light of social distancing requirements. The women were violating his rights, Brimen said in the message, adding, “they can end up in jail.” If Connor and Cárdenas didn’t retract their letter within hours, he said, “we’re going to take action, which again could result in legal action against your daughter.”

Brimen held the meeting, and it ended in a scuffle with him being ushered off the stage as police arrived, video shows.

Honduras Próspera said “the informational meeting, with appropriate social distancing, was essential to present a project that currently provides opportunities to the community, ensuring their rights are exercised in a safe, outdoor environment.”

Próspera employs residents in the village and has drawn some local support. Ariel Webster, who grew up in Crawfish Rock and does not work in the ZEDE, said Próspera has helped people there.

The situation has caused division within Crawfish Rock, pitting local employees against Connor, Cárdenas and those who support their fight. Last year, when the patronato hosted a group of ministers and delegates from the capital without inviting representatives from Próspera, some of the company’s supporters arrived at the meeting and clashed with those in attendance. The meeting ended in a brawl and a bloodied nose for Cárdenas.

Most concerning for Connor is that with the ISDS case filed, even a government that supposedly supports their fight against Próspera has done little to stop it from operating. She wonders if anything will stand in the way of the ZEDE’s expansion.

“If they don’t obey the central government,” Connor said, “what would they do to us?”

A Violent History

When the ZEDE law passed in 2013, Honduras was in crisis. The post-coup administrations cracked down violently on dissent. Protesters and dissidents were kidnapped, raped and murdered. In some cases, gunmen killed the children of activists rather than dissidents themselves, to inflict maximum fear.

These crimes were rarely investigated. With the homicide rate soaring, Honduras became one of the most violent countries in the world.

At the same time, the rightwing governments accelerated a trend begun in the 1990s, at the urging of the International Monetary Fund and World Bank, of privatizing state services and cutting public expenditures. Congress broke up the national energy company and began contracting with private enterprises to build new power generation, especially dams and solar farms. A new law eased the approval process for mines. 

The flurry of private contracts became part of a “kleptocratic” regime, according to one 2017 report by the Carnegie Endowment for International Peace. Nearly all of the ISDS claims have their roots in contracts, laws or other agreements made during this period.

For the farmers and villagers being pushed off their land, or having their water resources privatized, the development rush converged with spiraling violence.

“Nowhere are you more likely to be killed for standing up to companies that grab land and trash the environment,” the international watchdog group Global Witness wrote in 2017, “than in Honduras.” 

An opponent of a project that became the subject of two ISDS claims was murdered the following year.

At the center of these new laws and contracts was Juan Orlando Hernández, who was president of the Congress when the ZEDE law was passed and was elected president of Honduras later in 2013. Hernández would serve two terms as president—a step prohibited by the Constitution. The U.S. Department of Justice would later charge that Hernández used millions of dollars in payments from drug cartels to help buy off local officials to secure his electoral victories.

Eventually, Hernández, his brother and his chief of the national police would be extradited to the United States and convicted of drug trafficking and weapons charges. Hernández, U.S. Attorney General Merrick B. Garland said, used his time in power to run “one of the largest and most violent drug-trafficking conspiracies in the world.”

Hernández was convicted in March of this year and sentenced to 45 years in prison, while the former national police chief was sentenced to 19 years. His brother is serving a life sentence. Hernández did not reply to a request for an interview from prison.

Brimen, Honduras Próspera’s CEO, who immigrated to the United States from Venezuela, has said his goal is to provide a model that would foster prosperity, helping alleviate poverty by streamlining unnecessary bureaucracies that hobble governments, especially in parts of Latin America.

Up Against an Economic Superpower

The Castro administration’s fight against the ZEDEs is being waged from Tegucigalpa’s Government Civic Center, a set of gleaming buildings erected by Hernández’s government. The neat, modern plaza sits next to the presidential palace and houses many government offices, but its pedestrian entrance opens onto a busy street without a turn-off, resulting in a chaotic scene of double-parked taxis and honking, as if its architects failed to imagine that citizens would visit.

There, Fernando Garcia and a team of half-a-dozen young staffers compile documents and compose fervent social media posts denouncing the ZEDEs—there are two others apart from Próspera, focused on agricultural exports and mixed-use development, neither of which has filed an ISDS claim.

Garcia operates from a glass-walled conference room on a mostly empty floor, surrounded by stacks of folders, articles and books, including heavily earmarked copies of the Honduran Constitution and the Bible. He speaks passionately of his decades of service to the Honduran people—he served as economy minister and in other positions before the coup and is now presidential commissioner against the ZEDEs.

Garcia began his ZEDE fight as a member of the opposition to the post-coup administrations, soon after the law was enacted. He spent his time driving around the country to raise awareness and round up opposition, he said, mortgaging his home to help pay for gas and hotel rooms.

People would look at him in disbelief when he described what the ZEDEs were, “like I was a weirdo, or some strange animal,” he said in Spanish.

It was only once he was back in government that he realized how difficult the fight would be. Garcia said he met with leaders of the ZEDEs and requested information detailing their relationships with the government, but received little beyond heavily redacted documents. He said he asked what concessions they would like to continue operating in the country to replace the special status afforded by the repealed ZEDE law, but got nowhere.

Honduras Próspera said it sought negotiations with the government but received no response and has not received offers to switch to an alternative type of special economic zone. It added, “None of the other special regimes in Honduras offer similar levels of stability, international competitiveness, or compatibility” with the company’s business model.

Garcia said he does not even know whether there is still a commission in place to manage the ZEDEs. Próspera and the other ZEDEs would need such a commission to oversee their operations, yet Garcia and his team have been unable to uncover any documents indicating the existence of such a commission or identifying its current members.   

Today, the ZEDEs appear to be operating in a cloud of legal uncertainty. The law that enabled them was repealed in April 2022, yet that law contained language providing a minimum 10-year transition if such a repeal were to take place. The constitutional amendments that accompanied the ZEDE law remain in place, yet some lawyers argue these are insufficient to enable ZEDEs on their own.

Honduras Próspera argues the ZEDE has the right to continue operating for decades. That claim is based on the 2014 investment treaty Honduras signed with Kuwait, which included language that guarantees the legal status of the ZEDEs for 50 years in the event their enabling law was repealed. Honduras Próspera says it gained access to this through the Dominican Republic-Central America Free Trade Agreement, signed by the United States and Honduras, which includes a so-called “most-favored-nation” clause. The controversial clause allows foreign investors like Honduras Próspera to cut and paste more favorable provisions from other investment treaties, regardless of whether their home governments are parties to the other agreements.

The full nature of Honduras Próspera’s ISDS claim remains unclear because the pleading is confidential, as are those for each of the other 14 cases against the country. But Honduras Próspera told Inside Climate News that the government has acted illegally by pressuring banks to close accounts for businesses registered in the ZEDE and forcing companies in the zone to pay taxes and fees on goods they purchase or import, among other steps.

In other ways, however, the ZEDE keeps operating, collecting its own taxes, allowing construction according to its own regulations, baffling and frustrating officials and residents of the country in which it is located.

“We are up against the greatest economic power in the world.”

Many of the people who made the fight against the ZEDEs a national issue blame not only Próspera but the Castro administration, too.

“We feel a great abandonment,” said Christopher Castillo, an environmental and human rights activist in Tegucigalpa, who said Castro and many others owe their electoral victories in part to the ZEDE fight. Speaking in Spanish, Castillo said the government should block companies from running clinical trials at Próspera, for example, or order construction halted at the 14-story tower, built largely after the ZEDE law was repealed.

Garcia, the presidential commissioner, insisted the ZEDEs are operating without legal authorization, but he acknowledged that the government has done little to enforce that perspective. He argued that Honduras is outmatched and needs to proceed cautiously.

“We are up against the greatest economic power in the world,” he said. Beyond the billionaires backing Próspera, he said, “you need to recognize that the United States government always protects two groups: Its soldiers and its businesspeople.”

Two weeks after Honduras Próspera notified Honduras of its intent to file its ISDS claim, in September 2022, its executives met with Roy Perrin, deputy chief of mission at the U.S. embassy in Tegucigalpa “to talk about the investment climate in Honduras, the legal guaranties that allow entrepreneurs to create jobs and how sustainable investment can create economic opportunities for all Hondurans,” according to an embassy post on X written in Spanish. 

The following month, Laura Dogu, the U.S. ambassador to Honduras, gave a speech to the Honduran American Chamber of Commerce in Tegucigalpa in which she criticized some of the Castro administration’s policies on investment: “Without a doubt, all these actions are sending a clear message to companies that they should invest elsewhere, not in Honduras.” She added that the United States “will continue to exercise our right to meet with U.S. investors and advocate for the resolution of trade disputes in accordance with the state of trade law.”

Honduras Próspera began rounding up support back home, too, spending hundreds of thousands of dollars to lobby Congress and the White House, according to filings. The State Department issued an investment climate statement for Honduras in 2022 saying new policies, including the repeal of the ZEDE law, an energy law and an employment law, “have dramatically increased the uncertainty of investment returns.”

Senators Bill Hagerty (R-Tenn.) and Ben Cardin (D-Md.) sent a letter in October 2022 to Secretary of State Antony Blinken asking him to “encourage the Republic of Honduras to honor legal guarantees with respect to U.S. investments made” in the ZEDEs.

Rep. Paul Gosar (R-Ariz.) introduced a bill that would have directed the U.S. president to suspend foreign assistance to any government that failed to “engage in good faith consultations” with any U.S. national who sought negotiations with that government, a reference to Honduras, according to one of Honduras Próspera’s lobbying reports.

The State Department declined to make anyone available for an interview for this article but issued a written statement saying it “seeks fair treatment of U.S. investors and encourages adherence to the rule of law in Honduras as a key enabling factor for its economic development.”

Garcia said that even apart from the U.S. government’s economic and diplomatic heft, Honduran officials are wary of taking action against Próspera because of the ISDS claim. Under the arcane rules of international arbitration, Garcia noted, companies can claim “indirect expropriation” when governments take actions that harm an investment’s profitability.

“We have to act very carefully,” Garcia said.

This outcome may be no accident. It speaks to what critics of ISDS call “regulatory chill,” where a claim or even the threat of a claim can intimidate a government into reconsidering the policies in question. Dranias, Honduras Próspera’s general counsel, said in a recent podcast interview that ISDS “can be very effective to, let’s just say, create the right incentives for good behavior.”

“An Example for the World”

ISDS was meant to remove disputes from the political realm, but claims often become deeply partisan. Honduras has long been dominated by the United States and its commercial interests—it is where the term “Banana Republic” was coined to describe the domination of the United Fruit and Standard Fruit companies—and the country’s fight against international arbitration comes as part of the leftist government’s larger orientation away from its neighbor to the north.

In response to the ISDS claims, Honduras withdrew from a World Bank treaty that helps govern the system, though that decision does not affect existing claims and foreign investors can still lodge ISDS cases using separate, similar rules overseen by the U.N. and others. The country has been negotiating a new trade agreement with China and strengthening ties with Cuba, Nicaragua and Venezuela.

Torres, the vice foreign minister, said the government has been revising and ending contracts that gave private corporations overly favorable terms, saddling the Honduran state and its people with high costs. 

The previous administrations, Torres said, were not simply privatizing state assets but funneling public wealth to corporations and banks. Now that the Castro administration is trying to take that wealth back, he said, investors have turned to ISDS.

Torres’ large office is decorated with memorabilia and books that reflect an odd mix of Anglo pop culture and leftist politics. Framed prints of the album cover for Sergeant Pepper’s Lonely Hearts Club Band and The Godfather share space with books like “Capitalism’s Deadly Threat” and “Xi Jinping: The Governance and Administration of China.” 

The Castro administration’s critics—in Honduras and the United States—say it is turning toward communism and demonizing foreign investors. The country’s largest business group called the government’s withdrawal from the World Bank convention “economic self-sabotage,” a position that was recently printed across the front page of the country’s largest newspaper.

The business group’s manager of legal affairs, Gustavo Solorzano Diaz, said in an interview in Spanish that investors have turned to ISDS because they don’t trust the Honduran legal system and because the government’s new policies in the energy sector and others threaten to expropriate assets. 

The Castro administration has been plagued with its own corruption scandals, alleged ties to drug traffickers and accusations of nepotism. While overall violence in the country has declined, violence against women, human rights defenders and journalists increased last year, according to the U.N. High Commissioner for Human Rights. The administration has also been accused of suppressing dissent and using the military to fight crime.

And even some on the left have criticized the Castro administration’s handling of the ISDS claims. Castillo, the human rights activist, noted that the government failed to appoint an arbitrator in the Próspera case, leaving the spot to be filled by the World Bank.

Honduras’ solicitor general, Manuel Díaz-Galeas, who is handling the cases, declined to be interviewed or answer questions for this article. “I don’t care what the opponents and the plaintiffs’ spokespeople say,” Díaz-Galeas said in Spanish in a text message to Inside Climate News. “Tell them, if possible, that we will meet in court.”

All of this background, while deeply important to Honduras’ political leaders and many of its citizens, could prove largely irrelevant when and if the tribunals start hearing the ISDS claims. 

“There is no rule that requires a law to be adopted in a democratic or transparent process,” said Yarik Kryvoi, a lawyer who specializes in international dispute resolution, including ISDS.

Torres said Honduras is prepared to lose some of the ISDS claims, even expects to, but that the country will use them to expose what he calls the hypocrisy of developed nations, especially on climate change.

“They’re talking about climate change and the impact of climate change, but when a government or a community or a population tries to defend their resources, they most likely are defeated in international courts that always prioritize the interests of the private companies,” Torres said.

“The only strategy we have is to make our case an example for the world.”

Multimillion- or billion-dollar ISDS awards would inflate Honduras’ debt, and if it tried to avoid paying, investors could move to seize any foreign assets the country holds and close it off from capital markets.

“We cannot go to more environment summits without talking about the economics behind that,” Torres said.

He added, “The only strategy we have is to make our case an example for the world: ‘This is what they’re trying to do to a poor country that is one of the most vulnerable to climate change.’”

Back in Roatán, where rising seas are nibbling away at the coastline and heavy rains recently flooded parts of Crawfish Rock, the central government’s defiance is hard to see. If the country loses the ISDS cases, it would be taxpayers—the people of Crawfish Rock among them—who would pay, Cárdenas observed. Meanwhile, workers put the finishing touches on the 14-story tower. Próspera continues to hold weekly bonfires at its beach club, with live music and mixed drinks. And Connor and Cárdenas wonder what will happen next.

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