Trading with the Enemy

Saturday, March 17th, 2007

Trading with Dubai often means Trading with the Enemy:

The open secret is that Dubai buys far more than it keeps. More than a quarter of its $23 billion in annual nonoil imports are reexported, and Iran gets the biggest share. Interviews with private businesspeople and U.S. officials, along with court documents, reveal a simple scheme. Companies located around the world sell goods — from cigarettes to medical devices and PCs — to buyers in the U.A.E. Dubai traders repackage the items and send them along by air or ship to agents in, say, Tehran, Pyongyang, Damascus or Islamabad.

Smoking out the offenders is tough. Outside of free zones foreigners are not permitted to own a majority of a business in Dubai, and local partners aren’t subject to export-control laws. These realities leave bureaucrats in Washington pessimistic. “Whenever there are third-party transactions, there is only so much you can do to follow the path of the transaction,” admits a U.S. Treasury official.

Smuggling isn’t new to the Persian Gulf. But the system really took off around 1987, when the U.S. imposed its first trade embargo on Iranian goods and services in response to Tehran’s sponsoring of terrorism in the Middle East. By the time the 1995 oil sanctions took effect, it was a well-greased mechanism. Virtually all trade and investment with Iran was prohibited in 1997, though the ban on caviar, nuts, dried fruits and carpets was lifted in 2000. The penalties — fines of up to $250,000 for individuals and ten years in the slammer — should have deterred violators.

Yet it didn’t take long for U.S. products to seep through the cracks. As long as a decade ago, more than a quarter of the roughly $1 billion in American goods exported to Dubai ended up in Iran, estimates the Wisconsin Project on Nuclear Arms Control, a nonproliferation advocacy group in Washington, D.C. Last year U.S. companies sold $3.4 billion worth of goods to the U.A.E.; export licenses have jumped 47% over the last five years. “When you blow off the dust, the Dubai region sometimes means Iran and Libya,” says Paul DeBenedictis, chairman of the American Business Council of the Gulf Countries.

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