The Axis of Commerce
by Christopher S. StewartThe ship’s captain asks if I’m looking to smuggle something. We’re standing alongside a busy stretch of Port Saeed, on Dubai Creek, which is not actually a creek but a mucky Palmolive-green waterway, trash-strewn and oily, that stretches about eight miles through a thicket of shiny skyscrapers before draining into the Persian Gulf. It’s March, the sun is blasting down; the air is redolent of diesel fuel. The captain’s name is Khaled, and he’s headed to Bandar Abbas, Iran—about 100 miles northeast, nine hours by sea. “We’re leaving in a week,” he says.
The question of smuggling isn’t so far-fetched. It comes up a lot as I walk around and talk to the sailors. There are rumors of captains moving weapons, cigarettes, drugs, even nuclear equipment. Khaled, an Iranian former taxi driver with a mashed nose and tobacco-stained teeth, points at his 60-foot dhow. It’s flat-bottomed and has a swooping bow, a glassed-in wheelhouse, and a bashed-up hull that gives it the appearance of having done battle. Dozens of others are moored four and five feet deep, mostly destined for Iran. The scene is chaotic, with swinging cranes, fast-moving cargo trucks, and hundreds of dockworkers handling mountains of boxes and household appliances. (View a pop-up graphic.)
Khaled moves in close and then makes a confession: “I have many American products on my boat,” he says. Of the dozens of boxes rising above the gunwales, he calculates, about half hold American goods—and all are headed to Iran, despite a firm U.S. trade embargo meant to choke the life out of the so-called rogue state.
Khaled’s cargo, however, is either unmarked or simply reads u.a.e. His boss had the American goods repackaged when they arrived at the Dubai shipping terminals Jebel Ali and Port Rashid “to keep things quiet.” Other portside captains are less discreet. I see boxes of Carrier air-conditioning units and cartons of Crest toothpaste, and farther down the row are boxes labeled black & decker and coca-cola, along with stacks of Goodyear tires. I also spy a pallet of new
Hewlett-Packard All-in-One printers, probably 200 of them, and another of
Despite sanctions aimed at stemming the sales of U.S. products to Iran, the goods are still getting there. U.S. sanctions were first imposed against Iran in 1979, during the hostage crisis. The current embargo dates back to 1987, though it has since been tightened, and U.N. sanctions have been added. U.S. companies are forbidden to sell goods to Iran or knowingly provide them to a company that will sell them to Iran, with a few exceptions, including medical supplies. The rules are enforced by the U.S. Treasury and Commerce Departments, and violations carry civil as well as criminal penalties. Although American companies aren’t allowed to send goods directly to Iran, the U.A.E. does not impose the same limitations on its local distributors. Over time, that loophole has spawned what many agree is a decidedly murky trade, operating mainly under the public’s radar. The business is estimated to be worth billions of dollars annually, much of which goes directly to the bottom line of American companies. Each year, the U.S. sends more goods to Dubai, and Dubai, in turn, sends more goods to Iran. But the scope of the business isn’t really clear without a trip to Iran.
Three days later, I’m in Tehran. Much of the time, the metropolis is shrouded in a steely haze produced by the horrendous and perpetual traffic jams that snarl the streets. One of my first stops is the Capital Computer Complex, in the affluent northern part of the city. The seven-floor mall is a warren of stores with wall-to-wall electronics, everything up-to-the-minute. Some of the products are from Japanese and Chinese manufacturers, but a lot of them are American:
In other parts of the city are
What I learn in a week in Iran can be summed up in a conversation I have with an older man in a store selling H.P. printers.
“We like America,” the man tells me, “just not American politics.”
“But where does all this American stuff come from?” I ask.
“It comes from Dubai,” he says. “Everything.”
“But how does it get here?”
“Are you C.I.A.?”
Dubai, one of seven emirates, sits in a particularly fractious part of the Middle Eastern sandbox, with Iran, Iraq, and Saudi Arabia nearby. But when you’re in Dubai, it doesn’t feel at all like you’re in one of the world’s most dangerous regions. That’s part of the reason for its success. In a few short decades, the rulers of the sheikdom—the Maktoum family, now led by Sheik Mohammed bin Rashid al-Maktoum, who is both ruler of Dubai and prime minister of the United Arab Emirates—have transformed what was essentially a vast, windswept desert into a major commercial entrepôt and financial hub that the world can’t stop talking about.
The older part of the city, with its narrow streets and sun-beaten buildings, radiates out from the creek. The futuristic, slightly theme-parkish newer section rises from Sheik Zayed Road, a busy 12-lane highway, along which a line of unusually shaped glass skyscrapers, many still under construction, stand like a single row of toothpicks stuck in the sand.
Some of the grander places in Dubai have come to reflect the emirate’s outsize ambitions. The tallest building in the world (158 floors and still counting) is being built next door to the world’s largest mall (1,200 stores), and it has the world’s first self-described seven-star hotel (room rates start at $1,300), the world’s biggest amusement park (twice the size of Disney World), and the world’s largest man-made archipelago.
Dubai is a place of transients, having grown from a mostly indigenous population of about 275,000 in the late ’70s to
1.5 million today; the vast majority of those people are not natives. Many are here for business (there are no income taxes), while others come to see the sparkling city and enjoy the abundant sun. Along the streets are advertisements with slogans like discover life in a whole new light and buy me, change your life forever. These could just as well be the mantras of Dubai.
The emirate is modern, fast-moving, and thoroughly capitalistic, and it operates accordingly. Though its people are predominantly Muslim, Dubai is less interested in propagating radical Islam than in making loads of cash. The U.A.E. is also one of America’s most important allies: Dubai is home to a major U.S. naval port and is a source of regional intelligence. “Dubai is motivated by self-interest and business opportunities,” says David Stockwell, a partner in the law firm Bracewell & Giuliani. “Dubai is prepared to do business with fierce abandon—not weighed down by ideologies or past grievances. It is the best hope of the Arab world, something other than conflict and strife.”
There is, however, a dark side to this desert triumph. Laborers from the developing world, some of whom live 10 to a room in concrete camps, are, for the most part, building the city. Russian and Indian mobsters are said to fly in regularly with bags of cash. And the sex trade—its workers trafficked from places like sub-Saharan Africa, Eastern Europe, and Southeast Asia—is tolerated in high-end hotel bars, even though prostitution is illegal.
But the most astonishing secret, the one that Dubai would most like to keep under wraps, is how the emirate has transformed itself into the chief transit point for American goods entering Iran, allowing some of America’s best-known companies to skirt the U.S. embargo by routing their goods through the emirate’s ports.
Take a look at Dubai’s docks and the shelves in Iran, and it is relatively easy to figure out which American companies are bending the rules, either knowingly or unknowingly.
As far back as 1994, trade officials estimated that more than a quarter of the $1 billion worth of American goods entering Dubai were then shipped to Iran. During the past few years, despite growing tensions in the Middle East, something strange happened: The flow of American contraband on its way to Iran didn’t slow down—it surged.
Last year, the U.S. shipped almost $11.6 billion worth of goods to the U.A.E., the bulk of which went to Dubai. That’s a 230 percent increase over the past five years. Experts estimate that between 30 and 40 percent of those goods—$3 billion to $5 billion worth—are then exported, though there are no official numbers. Iran, meanwhile, has become the U.A.E.’s No. 1 trading partner.
Underlying the entire operation is an informal “Don’t ask, don’t tell” philosophy, focused on maximizing profits no matter what. Thanks to an almost perfect convergence of American and local business interests, this approach has essentially turned the emirate into a global center for sanctions-busting. Some exports are innocuous, like refrigerators and stoves; others, such as high-speed computer chips, military hardware, and nuclear components, are more ominous.
“I have to say the U.A.E.—and Dubai in particular—has become a significant hub that allows U.S. companies to circumvent or mitigate sanctions,” says Victor Comras, a retired U.S. diplomat and consultant on sanctions and terrorism financing.
“It is a huge hole,” says Mary O’Brien, a former special agent for the Commerce Department, who investigated Dubai’s commercial netherworld. She adds, “Some of what is going on is clearly illegal.”
Earlier this year, the Government Accountability Office released “Iran Sanctions: Impact in Furthering U.S. Objectives Is Unclear and Should Be Reviewed,” a report that spotlighted transshipment in the U.A.E. as a “considerable problem.” President Bush later flew to Abu Dhabi and Dubai with a request that the U.A.E. reconsider its business dealings with Iran. While Bush issued a subtle warning, Stuart Levey, the U.S. Treasury undersecretary for terrorism and financial intelligence, was more direct. In Dubai last year, he told a group of bankers and executives, “Those who are tempted to deal with targeted high-risk actors are put on notice.”
But will Dubai actually change? The game is making the sheikdom rich and powerful. “They’re reluctant to go too far, in part out of fear of antagonizing Iran, but mainly because of the bottom line,” says Michael Jacobson, a former Treasury Department official who is now a senior fellow at the Washington Institute’s Stein Program on Counterterrorism and Intelligence. “This is the way they are making their money, and this is how they are putting themselves on the map.”
It is difficult to separate the rise of Dubai from the fall of Iran. In 1980, not long after the emirate began opening its ports, Iran entered a war with Iraq; seven years later, the U.S.—worried about Iran’s burgeoning nuclear program and its soft spot for terrorists—leveled its first trade embargo. Dubai began to blossom. With its secure and open business environment and the U.A.E.’s impressive oil reserves, the emirate attracted tens of thousands of Iranian entrepreneurs. As legitimate trade increased, so did smuggling. Much of the U.S. merchandise that had once gone directly to Iran was suddenly being rerouted through Dubai. Iranian traders bought what they needed in the emirate and then sent it home.
Jebel Ali became the best-known terminal. Its inner basin is about two miles long, with 71 berths for cargo ships and tankers. It was probably Dubai’s first expression of its grand ambitions. After completing the terminal, the sheiks built a free-trade zone around it in the desert and dubbed it the Jebel Ali Free Zone, or Jafza; the zone was unique in the region at the time. Free-trade zones operate under special conditions meant to facilitate trade: Tariffs are waived, taxes are nonexistent, and regulatory oversight is minimal. In other words, it’s a world of exceptions that exists outside of the ordinary stream of commerce.
The arrangement was especially well suited to businesses that wanted minimal bureaucratic hassle, but it was also perfect for the growing number of shifty operators angling to transport such goods as cigarettes, hard drugs, and counterfeit pharmaceuticals without being detected. (The European Commission insists that the U.A.E. is one of the major suppliers of fake drugs being smuggled into E.U. countries.)
By the late ’90s, however, Dubai was thriving, with shipping money being quickly reinvested in building a better trading infrastructure. Jafza expanded from 25 to 35,000 acres, becoming so sprawling that it requires its own map. When I visit one afternoon, I get lost for a half-hour, driving on roads that look identical and anonymous.
The sheiks made shipping an art form: A container could be unloaded and the goods flown out in less than four hours, an incredibly quick turnaround time. Along with tourism, traditional shipping was boosted as part of a plan to move the emirate away from a dependence on oil for its income. International companies, seeing a modern center between East and West, began to arrive, and more free-trade zones were created. Today, 19 are in operation and 10 more are in the works.
It didn’t take long for sanctions-busting to go mainstream. As more Americans moved to Dubai and took advantage of Jebel Ali, their goods followed, and the amount of U.S. cargo being reshipped to Iran expanded. Politically, it was an odd time for this to be happening. When Bill Clinton was in office, the general American attitude toward Iran was softer; the global war on terrorism had not yet begun, and stealth arrangements with our enemies were less of an issue. But all that changed when the twin towers came down and, to a greater degree, after President Bush declared Iran part of the “axis of evil.”
Yet the more severe our approach toward Iran has become, the more we seem to be doing business with the enemy. The first hints of the problem came when the U.S. Commerce Department dispatched O’Brien, an almost 20-year veteran of the agency, to the U.A.E. in December 2002. The world she uncovered was “mind-boggling,” she says. “Everyone knew things were going in and out, but after I’d been there not very long, I realized that the scope of the problem was beyond what we realized was going on. The kinds of things I saw were amazing.”
Although her focus was on items requiring export licenses to leave the U.S.—goods with potential military or high-tech applications—her probes painted a vivid picture of what she described as “embargo-busting.” Her job involved visiting local storefronts, factories, and offices in the free-trade zones and elsewhere around the emirates, asking to see the U.S. cargo that they’d received. She prodded traders, trying to understand the game. Some confessed that merchandise was being shipped to Iran. “This was where it was headed much of the time,” O’Brien says.
It was bewildering, layered work. Sometimes, incoming cargo hardly touched ground before being flown, shipped, or trucked back out. “Swing a dead cat, find a diversion,” O’Brien joked with colleagues.
As the months passed, O’Brien gradually came to see an industry built around embargo-busting, an intricate ecosystem of middlemen who massaged and enhanced the gray market and then profited from it, which in turn helped build Dubai. In addition to commercial goods, some dual-use products that could be used for military purposes were also slipping through the cracks. Many of the traders were Iranian. Occasionally, it was obvious that some worked directly with Americans; in one case, an Iranian business in the free-trade zone was buying medical supplies that didn’t qualify for exemption from the sanctions from a U.S. company a few doors down.
At the center of Iranian business in Dubai was—and is—Nasser Hashempour, a solidly built man with stiff black hair, who, in addition to running a trading firm, is deputy president of the Iranian Business Council in Dubai.
I sit down with Hashempour at his office one afternoon. He tells me about the importance of Iran to Dubai. “Iranians have a very big role here, and Dubai knows it.” Iranians have partnerships in about 9,500 businesses in the emirates, according to Hashempour, the bulk of which are involved in exporting. Some are connected to the Iranian government and military. There are 450,000 to 500,000 Iranians living in the U.A.E., with three-quarters of them in Dubai. The number of Iranians in Dubai has almost doubled in the past five years, and they account for about a quarter of the city’s total population. Iranians here also have a lot of money—estimates run as high as $300 billion in assets. Many Iranians would not be in Dubai, Hashempour says, if it weren’t for American policy.
By the time O’Brien made her last trip to Dubai, a two-week special-inspection project in the spring of 2006, imports from the U.S. had increased by billions of dollars, as had the stream of gray-market goods continuing on to Iran. When I tell O’Brien I heard that about 40 percent of U.S. cargo is being there, she says that figure represents “just what we can account for.”
Today, many share O’Brien’s belief that some American companies are intentionally using Dubai as a conduit into Iran. “They would have to be extremely stupid not to know that their products are going to Iran,” says Rochdi Younsi, the Middle Eastern analyst for the Eurasia Group in Washington. “They do know.”
“I think a majority of these companies are well plugged-in in Washington,” he continues. “In D.C., they are given mixed signals, but they have more reason to believe that the U.S. is not going to take any action against them. So they go ahead and do it.”
There are dozens of American companies involved in the gray market with Iran. In both Dubai and Iran, I see Apple, Black & Decker, Dell, Hewlett-Packard, Procter & Gamble, and Xerox. With the exception of Apple, all have offices in Dubai’s free-trade zones.
The website of H.P., the U.S. technology brand I find most often in Iran, lists U.A.E. “partners” from whom locals may buy its products. Although Anette Nachbar, an H.P. spokeswoman, says that the company “does not have operations in Iran” and complies fully with U.S. export laws, H.P. has partners in Dubai who are eager to do business with Iran.
I call a number of these U.A.E. partners of H.P. and ask if they ship printers to Iran. The first three are ready to make deals. Another company, Jumbo Electronics, says it can offer H.P. laptops and notes that if anything needs to be fixed that falls under warranty, there are many authorized H.P. service providers in Tehran. In Dubai, one distributor on the creek promises that he can get 200 All-in-One printers in two hours and ship them to Iran. “If anyone asks, I’m the end user,” he says, using the language of the U.S. sanctions. When I ask H.P. if the company knows this is going on, Nachbar responds, “We’re just not in a position to disclose more information.”
Dell also indicates that it doesn’t sell to Iran, but like H.P., the computer maker seems to be turning a blind eye when it comes to its distributors. Even though Metra Computers, one of a handful of local distributors listed on Dell’s website, says it can handle bulk orders to Iran, its contracts with distributors ban reselling to Iran. A Metra salesman says that the company can’t ship directly to Iran, but he knows of “many” third parties that “do that consistently.” He adds, “My objective is to make new customers. We are big-time into Dell.”
Black & Decker’s approach is slightly different. I find at least a half-dozen stores in Tehran selling the company’s tools. Some feature big billboards advertising the company as well as its latest drills and handsaws. In addition, Black & Decker’s website actually lists a store in Tehran. When I talk to Roger Young, a company spokesman, he explains that the Tehran store is unrelated to the parent company in the U.S. and that any business between Iran and Dubai, or anywhere else, goes through its “non-U.S. subsidiary”—another loophole in U.S. rules that allows companies to deal with a sanctioned country as long as there is no American oversight. So instead of moving through middlemen, Black & Decker products are sold in Iran through an unaffiliated foreign subsidiary.
When I press Young for more information about Black & Decker’s business in Iran, he says that the Middle East represents less than 2 percent of the company’s business.
Procter & Gamble is another corporation using non-U.S. subsidiaries for dealings with Iran. Rotha Penn, a company spokeswoman, explains, “Were we to stop this legitimate activity, it is likely that inferior, counterfeit products would be sold to consumers instead of the genuine brands.”
Recent U.S. Securities and Exchange Commission filings for both Procter & Gamble and Black & Decker make no reference to Iran.
Meanwhile, in a footnote to its most recent annual report, Xerox states that it terminated business ties with Iran in 2006 but still maintains local “legacy obligations.” The profits from the business, while declining, are robust—$7.7 million in 2007, down from $9.6 million the year before.
American firms, even those using proxies, don’t want to talk or even speculate about how their products traveled from Dubai to Iran, but the merchants I meet in Tehran are more open. At the Capital Computer Complex, a man who sells only Dell laptops and whose store has Dell boxes piled on the floor and stuffed onto shelves, admits that he ordered everything from Dell’s distributor in Dubai. Another man selling almost exclusively H.P. products tells me he did business through an office in Jebel Ali, while a man selling Apple iPhones, MacBooks, and iPods will say only that he has “relationships” in Dubai. (An Apple spokesperson says the company obeys U.S. laws.)
For the most part, American goods in Tehran are 20 to 40 percent more expensive than they are in America. An 8-gigabyte first-generation iPhone, for example, cost $400 in New York; at the Capital Computer Complex, after some haggling, it can be had for $700. A new Dell XPS 1M330 sells for $1,800, about $300 more than in the U.S.
The Iranian merchants say that most U.S. products land in Iran either at Tehran’s Imam Khomeini International Airport or at Bandar Abbas, the biggest port city in southern Iran and the destination of many of the creek dhows. Bandar Abbas is a hot, flat, salty place that wouldn’t be much if it weren’t for the port and the Iranian naval base. From a boat in the Strait of Hormuz, I watch the dhows and tankers streaming in and out. At one point, I meet a captain whose ship, just in from Dubai, carries a half-dozen new American vehicles, including two Chevy Blazers.
It isn’t the volume of boats or the number of boxes piled on their decks that surprises me. It is the visible Iranian military presence. The port, tucked away in an inlet, is fortresslike, bristling with defenses. Double-engine speedboats buzz back and forth constantly, and armed men patrol the port entrance. We stare at the port for only a couple of minutes before our captain tells us we are being watched. “It’s time to go,” he says. “We are much too close.”
Although a shared culture and history connect the U.A.E. to Iran, the two countries are not natural partners. While Iran is Persian and its religion is primarily Shia Islam, the U.A.E. is predominantly Arab and Sunni and is closer in outlook to Saudi Arabia. In addition, Iran has a long-running dispute with the U.A.E. over three islands that Iran occupies.
The ruling sheiks of the U.A.E. are allies of both Iran and the U.S. They have said publicly that they support peace in the Middle East, but not everyone I speak to in Iran really believes that the sheiks want to end the contretemps, let alone seriously lobby the White House for U.S.-Iran rapprochement. The strife has been bad for Iran but very good for the emirates.
Yet as O’Brien notes, “The U.A.E. walks a fine line.” For years, it hadn’t had to make much of a political commitment to either country, priding itself on being politically agnostic and strictly focused on business. In the spring of 2006, however, its comfortable middle ground began to be threatened. Discussions between the U.A.E. and U.S. about the emirates’ trade with Iran led to heated public statements and threats of intervention from Washington. As tension between Iran and the U.S. flared in the spring of 2007, the U.A.E. promised to impose its own version of export controls, focused mainly on intercepting sensitive materials. The sheiks instituted the new law in August and, as if to demonstrate its commitment, 40 local companies said to be involved in illegal exports were shuttered and an Iran-bound freighter carrying “hazardous chemicals” was impounded.
It’s uncertain how much has actually changed. The Commerce Department notes that it is optimistic about the new controls, though it wouldn’t comment about its most recent inspections. Hashempour, however, says trading continues as usual. “If people want it, the goods will go to Iran.”
Even if Dubai does focus on sensitive goods, the broader issue remains unresolved. The sheikdom appears to avoid the conversation, and dealing with the question in the future may prove complicated. Some blame the U.S. for not taking a more punitive stance toward its own companies. The Treasury and Commerce Departments have each sent only one inspector to the U.A.E. And while penalties have increased for businesses discovered to be dealing directly or indirectly with Iran—with fines of up to $1 million for companies and potential prison time for individuals—proving guilt is particularly difficult. Which companies have shipped products knowing that they would end up in Iran, and which really have no idea?
It is an especially tough question to answer, with so many levels of middlemen and more than 700 American companies now operating in the emirates.
Between the two agencies, about two dozen cases were successfully prosecuted in the U.S. in 2007, but these certainly don’t appear to have offered a compelling reason for other companies to pull back.
This is Dubai’s conundrum. “If the U.S. is serious about shutting this business down and making sanctions effective,” the Eurasia Group’s Younsi says, it is “going to have to devote a lot more resources to this—not just enforcement and staff—but more diplomatic leverage on the U.A.E., pushing hard to get them to do this.”
Which raises a larger question: Does the U.S. really care about goods going to Iran? Is overlooking this trade a way of repaying Dubai for its friendship?
In February, Sheik Mohammed climbed into his private jet and headed to Iran. After meeting with the emir, Iranian President Mahmoud Ahmadinejad declared that “the U.A.E. prime minister’s visit is proof that U.S. policies will not have any impact in the region,” according to the Asia Times. It was as though the sheik had not yet decided exactly how far the U.A.E. would take its promised reforms when it comes to trade with Iran.
In one of my last days in Dubai, I walk along the creek looking for anything suggesting that life in Dubai has altered, that the middlemen have been scared off, that U.S. companies have slowed shipments, or that anything has curtailed the trade.
I wander around in the sun for a while, hunting for a customs office, trying not to get taken out by trucks and men running around with boxes, some with American brand names and logos on their sides. Boxes are all over the place, mountains of them, and the dhows brim with sailors and workers. The first customs booth is locked and abandoned, but the second has some activity. Two men are washing two white S.U.V.’s, while two other men in immaculate white robes look on. One of the S.U.V.’s has a sticker reading v.i.p. on its rear window.
“It’s a beautiful day,” Ibrahim al-Rubati, the head of the station, observes as the port buzzes behind him. I say that they look busy, and he laughs. We talk about the hundreds of ships that come and go, to Somalia and to Iran. I mention all of the U.S. products flowing northeasterly. He nods, and his associate alerts the car washer to a smudge on a window.
“We make everything easy here,” Rubati says finally. “Things come and go fast.”
I ask if anything has changed as far as policy at the creek in the past year or so. He shakes his head. “Not here.”
It looks chaotic, I say. He nods again. “I don’t understand the political situation with U.S. and Iran. It is a sad time,” he says. “But we just make things easy, and the money comes from that. Whatever is happening outside of this country does not matter to us. This is Dubai.”
Tuesday, September 2, 2008
American Companies Sneaking Around The Iran Boycott
Hewlett Packard, Apple, Procter and Gamble, Dell, Black and Decker and Xerox all American Companies all going around the US interests by finding a loophole around US Boycott of Iran. Not ONE of these corporations sell directly to Iran, they find a distributor that sells to Iran. In many cases through Duabi. The ships captains say "its just business, please do not tell your president." In this month's Conde Nast Portfolio, Christopher S. Stewart investigates how U.S. companies are using Dubai as an illegal conduit into Iran:
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