‘Pure Greed’: A Legal System That Gives Corporations Special Rights Has Come for Honduras

For the last couple of years, a growing number of political leaders, lawyers and activists have warned that an obscure arbitration system in international law is slowing climate action and undermining fragile democracies across the developing world. Investor-state dispute settlement, or ISDS, allows corporations to bring multi-billion dollar legal claims against governments that have rejected mining permits, enacted new taxes or taken other actions that can affect the value of their investments.

Nowhere are the system’s injustices more apparent, its critics say, than in Honduras, which is one of the poorest countries in Latin America and the focus of a new report that ties a wave of ISDS claims to the country’s violent and corrupt history.

Honduras is facing 15 ISDS claims. Eleven are seeking up to $14 billion collectively, a figure nearly four times larger than the country’s 2024 public investment budget. The amounts being sought in the other four claims are unknown.

All of these claims involve contracts or laws adopted after a military coup toppled the government in 2009 and ushered in 12 years of rightwing rule, a period when corruption and violence spiked. A former president from that era and other top government officials are now in prison, convicted on drug trafficking and weapons charges in the United States.

Most of the claims stem from efforts by the current, democratically elected government to renegotiate contracts or reform or repeal laws that were adopted in the post-coup years. The exact nature of the ISDS cases are unclear, however, because none of the claims have been made public. Like other ISDS claims, they are based on a combination of trade and investment treaties, contracts and domestic law.

The report, published Thursday by a group of progressive advocacy and research organizations, details what it calls the “mafia-style” investments behind the claims, linking them to irregularities, corruption, criminal networks or legal frameworks that the advocacy groups argue were adopted undemocratically. Few if any of the investors behind the claims have been publicly accused of engaging in corruption. Instead, the report alleges, many of their business deals involved others who have been linked to corruption or drug cartels that had infiltrated the state, or included irregularities like no-bid contracts shrouded in secrecy or a lack of due process. 

Broadly speaking, the report’s authors said, the investors either knew or should have known that the government officials with whom they were dealing were engaged in this widespread corruption and criminality. Now that those contracts or laws are being reformed or renegotiated, the investors are turning to ISDS.

“I just think it exposes ISDS as a further tool of pure greed,” said Jen Moore, an associate fellow at the Institute for Policy Studies and one of the report’s authors. “If there are arguments for its abolishment, I think the example of what’s going on in Honduras should be one of the first ones that’s put forward.”

In its series Cashing Out, Inside Climate News has reported on how the ISDS system is disrupting climate action, harming Indigenous communities and being used by foreign investors to win large sums from governments even when those companies leave behind environmental contamination, violate human rights or break national laws.

Defenders of the ISDS system, including some business interests in Honduras, say it helps protect foreign investors from corrupt domestic court systems or governments that seize their assets. They argue that Honduras has taken exactly these types of steps under President Xiomara Castro, who took office in 2022 and soon enacted a law that allowed the renegotiation of electricity contracts, for example.

White and Case, an international law firm based in New York that is representing companies behind nine of the claims against Honduras, wrote in a client alert that the Castro government’s policy changes “have created uncertainty and erosion of value for investments.”

Castro also delivered on a campaign pledge to repeal a law, enacted in the post-coup years, that had allowed private interests to set up semi-autonomous enclaves empowered to enact their own civil laws and regulations, levy taxes and establish their own courts. Soon after the law was repealed, a U.S. company called Honduras Próspera Inc. lodged an ISDS claim seeking up to $10.775 billion. The company argued it had a 50-year right to continue operating a “startup city” it had launched under the repealed legal framework, citing trade and investment agreements Honduras had signed with the United States and Kuwait.

The repeal and claim have cast a shroud of uncertainty on the legal status of the startup city. Honduras Próspera has continued to operate under the now-repealed legal framework, and the government has not forced it to stop, with officials saying they are wary of jeopardizing their position in the ISDS case.

Last month, Honduras’ Supreme Court declared the now-repealed law unconstitutional and said in a press release that the decision will apply retroactively. It is unclear exactly what effect the decision will have on Honduras Próspera’s startup city or on its ISDS claim, however, because the court has yet to publish its decision.

Honduras Próspera has called the ruling “illegitimate,” warning that it “threatens to expropriate more than $120 million in U.S. investment.”

In an email to Inside Climate News, the company’s general counsel, Nicholas Dranias, called the report’s “mafia-style” characterization “obviously libelous, unjust, and absurd,” adding that the ISDS claim was attempting to hold Honduras to its own legal commitments.

Honduras Próspera’s critics in that country have not accused the company of engaging in corruption but fault it for taking advantage of a controversial law that was enacted under disputed circumstances in the post-coup years, and for seeking an award that is orders of magnitude more than it has invested.

The ISDS claim prompted dozens of Democrats in Congress to call on the Biden administration to step in to support Honduras and strip ISDS out of the Dominican Republic-Central America Free Trade Agreement, on which the claim is based. The Biden administration has declined to intervene in the case. 

The U.S. ambassador to Honduras, Laura Dogu, has said that Castro administration policies “are sending a clear message to companies that they should invest elsewhere.” And Sens. Ben Cardin (D-Md.) and Bill Hagerty (R-Tenn.) and other U.S. lawmakers, have publicly supported Próspera.

Half of the other ISDS cases against Honduras focus on the energy sector, which was subject to a wave of privatization after the coup that the current government has attempted to reform. Foreign energy companies have brought seven claims, all of which have origins in contracts from this period of privatization. 

The report details widespread irregularities associated with these contracts. Many were awarded without a bidding process. Some companies were awarded contracts even though they didn’t meet legal eligibility requirements. Solar companies with no solar experience won awards. Contract awards were sold to third parties within months. And some contracts required the government to pay above-average rates for electricity, the report said.  

When Castro took office in 2022, she inherited a national energy company in deep financial distress, incurring losses at roughly $646 million per year. When her government sought to renegotiate contracts and passed legislation that rolled back some of her predecessors’ energy policies, companies began filing ISDS claims. 

In five of the seven energy-related cases, investors are seeking a combined $1.3 billion, far more than the companies invested, according to the report. The amounts sought in the two other cases are not public. Companies filing ISDS claims can often seek and win compensation not just for real losses but also for unearned, expected future profits.

Moore, one of the report’s co-authors, said it is common for foreign investors to use ISDS claims as a negotiation tactic, especially when dealing with developing countries. Two Norwegian investors seeking $200 million each, for example, are using the claims “to pressure the State during the renegotiation of their contracts,” the report alleges. 

One of the solar projects at the heart of those two claims, known as Los Prados, has been the subject of fierce community resistance, with locals saying they were never asked whether they wanted the solar farms. Some locals have supported the project while others feared the development would consume scarce farmland and freshwater in a drought-prone region. The division sparked violent conflict in one of the most dangerous regions in the world for environmental defenders. 

Opponents of the project have faced threats and expensive legal charges. One local leader was murdered in 2018. A partner in the second solar project owned by the Norwegians was later convicted of helping to orchestrate the 2016 murder of Berta Cáceres, an Indigenous environmental activist who fought a prominent campaign against an unrelated dam project.

A spokesperson for Scatec, a Norwegian company behind one of the claims, said in emails to Inside Climate News that it “takes allegations of corruption very seriously and confirms that we adhere to the highest standards of compliance and transparency.” The spokesperson said the company “closely scrutinized” the activities of the solar project partner and “did not find indications of corruption, nor indications that he could be involved in such appalling violations of criminal law.” The company added that the 2018 murder “had nothing to (do) with opposition to the Los Prados Project.” 

Scatec said proceedings of its arbitration claim have been suspended and that the company maintains an “ongoing dialogue” with the Honduran government. Norfund, a Norwegian government-owned investment fund that is a party to the other claim, referred questions to Scatec.

Karen Spring, a Honduras-based human rights defender and researcher and a co-author of the report, said it is impossible to know the full circumstances surrounding the 2018 murder because it has never been properly investigated. 

Community opposition also figured prominently in at least six other claims, including one related to the construction and operation of a toll road connecting Honduras’ Atlantic and Pacific coasts. Locals deemed the project, promoted by the post-coup government, a “Monument to Corruption.” 

Opponents of the toll road, many poor and living near or below the poverty line, were incensed that they had to start paying to travel on an existing road that their tax dollars had already funded, according to the report. Protests lasted for more than 14 months, according to the report, culminating in opponents torching the toll booths in the wake of the 2017 presidential election, which was plagued with allegations of fraud. 

When the contract between the government and operator, Autopistas del Atlántico, became public in 2018, it showed that it contained no cost-benefit analysis, empowered the investors to carry out studies that determined the minimum annual income they would receive and imposed steep penalties on the government for early cancellation of the contract, according to the report.

“The terms of it were just completely deleterious for the country,” Moore said. 

In 2018, Honduras canceled the project and a probe into alleged irregularities was opened, according to the report, though the authors were unable to determine the outcome of the investigation. In 2023, the project’s investors, including JPMorgan Chase and two Goldman Sachs investment funds, filed an ISDS claim seeking just under $180 million, far more than the $42.8 million they invested, according to the report. 

Antonio Pavel, general manager of Autopistas del Atlántico, disputed the claims in the report and told Inside Climate News there is no proof of any probe into allegations of corruption involving the project, or of any such allegations. The project, he said, has been “nothing but transparent from the beginning.” 

Pavel added that the $42.8 million cited in the report only accounts for construction costs and that the company incurred legal fees, financing and other expenses that substantiate the $180 million claim.  

JPMorgan Chase and Goldman Sachs did not respond to requests for comment.

The report’s authors said they wanted to convey the scale of criminality and corruption in Honduras and to show how the ISDS claims link back to these problems, even if indirectly, because of how the contracts and laws were enacted after the 2009 coup.

“Now you have these international arbitration panels that allow these companies, kind of encourage these companies, to sue states, when they themselves, these companies, should have known what they were investing in was extremely risky,” said Spring.

The ISDS system is based on commercial arbitration and primarily interested in holding governments to their commitments, regardless of whether those governments are autocratic or engaged in widespread corruption. 

“All of that just disappears when you bring an ISDS claim,” Moore said. “I think that’s part of our argument, why I feel like these claims are unjust in the first place, and the fact that the system exists in the first place is also unjust. But they have it, and it’s very powerful.”