The United States has cautioned American investors about risks in Nicaragua after the Central American nation passed legislation that critics describe as a sweeping land grab along its borders with Honduras and Costa Rica.

Nicaragua's National Assembly last week approved a law declaring a 15-kilometre strip along the country's frontiers as state property, ostensibly as a national security measure to combat organised crime and international drug trafficking.

The move has prompted sharp criticism from Washington and Nicaraguan opposition figures in exile, who argue it represents a systematic confiscation scheme that could affect thousands of residents and businesses in the border regions.

"The Murillo-Ortega regime's massive confiscation of lands within the 15 kilometers adjacent to Nicaragua's borders devastates dozens of communities and puts the lives and livelihoods of thousands at risk," the US Embassy in Managua posted on X.

The embassy added that "any US citizen thinking about investing in Nicaragua should be cautious," reinforcing similar guidance from the State Department's Bureau of Western Hemisphere Affairs.

The controversial legislation comes as Nicaragua reported foreign direct investment inflows of $3.4bn in 2024, an 8.6% increase from the previous year, according to Central Bank data. Net FDI flows reached $1.35bn, up 21.4% year-on-year, with the United States remaining one of the top sources alongside Panama.

The law, which replaces earlier 2010 border regulations, establishes what authorities term a "special control zone" under military surveillance. Whilst government media outlets claim the measure "does not affect" current residents, legal experts warn it creates profound uncertainty over property rights within the designated area.

According to Confidencial, the new law grants the Nicaraguan Army expansive authority over the border zone, potentially facilitating concessions to foreign enterprises, particularly in the extractive industries. Analysts suggest the measure could ease the transfer of natural resources to international companies, notably Chinese mining firms seeking access to protected areas near the borders.

The border law represents the latest move by President Daniel Ortega, 79, and his wife and co-president Rosario Murillo, 74, to consolidate control over Nicaraguan society. The former Sandinista guerrilla leader, who first served as president from 1985 to 1990 before returning to power in 2007, has maintained an increasingly authoritarian grip since widespread anti-government protests in 2018. 

The government's violent suppression of those demonstrations, which Ortega and Murillo characterised as a Washington-backed "coup d'état," resulted in more than 300 deaths, according to UN estimates. The Ortega government has increasingly turned to China and Russia for economic and diplomatic support, with Chinese companies becoming particularly active in Nicaragua's mining sector.

Yet, despite its anti-Western alignment, Nicaragua continues to attract foreign investment, with the industrial sector drawing $419.1m in net FDI last year, followed by financial intermediation at $282.6mn and energy and mining at $260.8mn. Spain, Barbados, Costa Rica and Mexico featured amongst the leading sources of investment capital.

The latest border legislation raises fresh concerns about property rights and the rule of law in a nation already facing international criticism over its democratic backsliding. The creation of state-controlled border territories, combined with enhanced military authority and the potential for arbitrary expropriation, could further complicate Nicaragua's investment climate at a time when the government seeks to maintain economic growth through vital foreign capital inflows.

For investors already operating within the newly designated state property zone, the law introduces immediate uncertainty about asset ownership and operational continuity, whilst prospective investors must now weigh the heightened political risk against potential returns.