The new Casablanca: Why Dubai draws Iran, intrigue, and tusk smugglers

Dubai is known to be among the world's most freewheeling business environment – and one that is attractive to Iranian businesses looking to circumvent Iran sanctions.

It's been a freewheeling time even for Dubai.

In just two weeks in February, authorities seized Iraqi artifacts being smuggled in a chair pad, caught a traveler to Europe hiding heroin pills in his stomach, and found that $3.5 million of elephant tusks had slipped across their borders before being intercepted in Thailand.

Simultaneously, the murder of a Hamas gunrunner in his five-star hotel room here was flooding international headlines with sensational details of the hit squad with its fake passports and disguises. And now, Dubai's thriving trade with Iran is drawing fresh ire from the United States as it pushes for a fourth round of United Nations sanctions against Iran firms.

The emirate that put itself on the map with its "anything goes" attitude toward pleasure – building everything from islands to an indoor ski slope in this Bedouin land – has in recent months gained notoriety for its apparently similar disposition toward business.

Smuggled whiskey and Afghan drug money

Like entrepôts past – think Casablanca, Panama, Miami – Dubai naturally attracts smugglers. Its strategic location between Europe and Asia adds to its appeal. And while the authorities have taken steps to nab contraband, especially when pressured from abroad, they are reluctant to slow with paperwork the speed of business that makes Dubai, Dubai.

"As long as the illicit activities do not interfere with the safety and security of the hub, they can coexist," says Tarik Yousef, an expert in Arab world economies and dean of the Dubai School of Government. "They can even take advantage of the hub."

Many do. Smuggling, along with financial crimes, make up "the majority of serious criminal activity" in the United Arab Emirates (UAE), according to a 2008 report by the Financial Action Task Force (FATF), a global monitoring body.

That includes whiskey bottles clinking in their crates as they're trucked across the desert into teetotal Saudi Arabia. Russian women are flown here and forced to work as prostitutes. Suitcases of cash from the Afghan drug trade are carried in to be laundered.

And all manner of goods banned by the UN for Iranian use are packed and sailed across the Gulf – a trade sure to reenter the global spotlight once new sanctions pass, possibly within weeks.

Dubai, lacking oil, has long invited trade

Dubai has long invited trade because it lacks the massive oil reserves that have made its Gulf neighbors rich.

It began setting up free-trade zones in 1985 and slashed its import tax to 5 percent, a now-common standard in neighboring countries. It established a reputation for processing cargo quickly – a vital service for firms shipping goods via Dubai from, say, Sweden to Pakistan.

In 1979, Dubai opened the world's largest seaport – so big it can be seen from space. The port of Jebel Ali has been ranked the top seaport in the Middle East for 15 years in a row by trade publication Cargonews.

Next door is the Jebel Ali Free Zone (Jafza), a sort of duty-free megastore for the 6,500 firms that have set up shop. There, they can manage their shipments without paying tariffs and avoid UAE restrictions on foreign ownership and hiring. And, with so many firms, Jafza can meet most business needs – a synergy other nations in the region haven't matched.

"You can pretty much do your business without having to worry about who you have [available]," says Ali Talev, a Lebanese businessman who has worked in Dubai for 10 years. Transportation firms alone number around 200, which "allows you to move your product very fast."

Why firms ship goods 1,000 miles farther for Dubai's services

Dubai operates so quickly that it takes longer to ship goods directly from Europe to Saudi Arabia's western coast city of Jeddah than to sail an extra thousand miles past Jeddah, around the Arabian Peninsula to Dubai, process the goods here, and truck it back across Saudi Arabia to Jeddah, says Mark Woodcock of TNT, a major shipping company.

"Most of the goods we bring here today are available for entry into the country later today or tomorrow. In Jeddah it takes up to a week," he says. In other Gulf countries, the "paperwork is more restrictive than [in] the UAE."

Dubai has "solidified" its stance as the leading trade hub in the Gulf, says Dr. Yousef, who co-wrote the World Economic Forum's report on competitiveness in the Arab world. "There is no close second."

US scrutiny over Iran ties

Dubai's close trade ties with Iran have brought special scrutiny from the US, which sees strict enforcement of UN sanctions as key to pressuring Iran to cooperate more fully on nuclear inspections.

But despite US efforts to turn off this key spigot in recent years, trade between Dubai and Iran tripled from $4 billion in 2005 to $12 billion in 2009. Iran imports 50 percent more from the UAE than it does from China, its next-biggest trading partner, according to the most recent data from the CIA World Factbook.

The number of Iranian businesses based here has swelled to about 8,000, most of which operate legally. Some are run by the Revolutionary Guard – the corps President Mahmoud Ahmadinejad has used to tighten his grip on everything from security to Iran's oil industry.

Dubai is loath to sever its longtime bonds with Iran, snub a powerful neighbor, or snuff out lucrative trade.

With the US bearing down, though, Dubai has agreed to comply with UN sanctions, which limit trade in weapons, shipping, and banking. It is also reportedly withholding work visas from Iranians and taking more time to clear Iranian shipments.

Banks, under pressure from US Treasury officials, are squeezing Iranian businesspeople, denying them the credit lines critical to trade.

"There is no doubt" the authorities are singling out Iranians, says Masoum Zadeh of the Iranian Busi­ness Council, who has been a trader here for 28 years. His spacious office overlooks the Dubai Creek, an artificially expanded waterway that has become a launching point for many shipments to Iran. "They don't say it, but we can feel it."

Why spies flock to Dubai

Indeed, with so many Iranians in Dubai, US consular officials here regularly pump that large pool for information or recruit them to spy, says Jim Krane, author of a recent book about Dubai.

Many countries have active intelligence operations here in this open and strategic spot, he says. "There are so many reasons to be in Dubai ... business, tourism, and conferences, that it's easy for spies to maintain 'plausible deniability.' "

Israel's Mossad is widely believed to have sent dozens of agents to Dubai to assassinate Mahmoud al-Mabhouh, the Hamas operative, though Dubai's tough-talking police chief made clear that such a brazen attack was a step too far. After a quick and impressive investigation, his department secured international arrest warrants for some two dozen suspects from abroad.

Dubai has also drawn praise for its "swift and extensive" cooperation in cracking down on terrorism financing after the US Congress's 9/11 com­mis­sion found that most of the funds for the 2001 attacks were funneled through the city. Suspected terrorism activity was "dealt with expeditiously" and punished, said the FATF.

As for the crackdown on illicit trade with Iran, it's unclear how much the authorities are making a dent – particularly for state-backed companies. US officials say they may be fighting a long battle and that they hope to persuade Dubai to crack down harder or risk its international reputation.

Yet even if the emirate were to sacrifice its breezy business climate, illegal traders would just go elsewhere, says Prof. Jean-François Seznec at Georgetown University in Washington, a Gulf specialist.

Dubai follows a long line of entrepôts where smugglers and money launderers gather, he points out, arguing that "there's always a market for this kind of free trade."