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By Kambiz Foroohar Jan. 26 (Bloomberg) — On a sweltering mid-October evening, horns blare as pickup trucks at Dubai Creek wharf jockey to deliver cargo bound for Iran. Televisions, cartons of toothpaste, car parts, refrigerators and DVD players stretch for about a mile on the dock along the murky waterway that snakes to the Persian Gulf. “We’ll take anything as long as you pay us,” says Ali, a 24-year-old Iranian deck hand in an oil-stained T-shirt, as he pulls down a blue tarpaulin covering air conditioners, tires and tea bags headed for the port of Bandar Abbas , 100 miles (160 kilometers) across the Gulf. “We’ve taken American stuff — printers, computers, everything.” Years before the world turned its attention to Dubai’s financial crisis, the second largest of the seven states in the United Arab Emirates was amassing clout — and money — as Iran’s back door to the West, Bloomberg Markets magazine reported in its March issue. Iran’s biggest non-oil trading partner provides a stream of household items — from diapers and mobile phones to laptops and washing machines — as well as illicit items such as aircraft parts and computer chips that the U.S. says have nuclear and military uses. The U.S. forbids American companies from sending anything to Iran, with limited exceptions, such as medical supplies, and has pressed other nations to stop doing business with the country. The Justice Department has prosecuted foreign companies that sell American goods with military uses to Iran. ‘Offshore Business Center’ The U.A.E. was the biggest importer of U.S. products in the Middle East and North Africa, the Government Accountability Office said in December 2007. It ships out as much as 80 percent of the material — and as much as a quarter of that heads to Iran, says Jean-Francois Seznec , a professor at Georgetown University’s Center for Contemporary Arab Studies in Washington. From 2005 to 2009, trade between Dubai and Iran tripled to $12 billion, according to the Dubai Chamber of Commerce. Iran’s main exports to Dubai are nuts, carpets and petrochemicals. “Dubai is Iran’s offshore business center,” says Afshin Molavi , a fellow at the Washington-based New America Foundation , which analyzes public policy. “Dubai plays a huge role in Iran’s economy.” Dubai’s porous borders enable Iran to snub the West. The Islamic Republic has disregarded United Nations Security Council demands that it cease work on its nuclear program, which the U.S. and its allies suspect is geared to giving Iran nuclear weapons. The U.S. State Department charges that Iran’s regime backs terrorist groups, including the Taliban in Afghanistan and Hamas in the Palestinian territories. Close Economic Ties Imports from Dubai are helping to grease the economy at a time when the Iranian government is struggling to keep a lid on a growing demand for democracy. Iran’s footprints are everywhere in Dubai. About 8,000 Iranian businesses, and at least 1,200 trading companies, operate in the emirate, according to the Iranian Business Council , a Dubai-based group that promotes economic ties. The sprawling Iranian Club offers outdoor sports facilities, a stadium, a hotel, a theater and a restaurant with some of the best Persian food in town. Dubai doesn’t enforce the wearing of Islamic hijab for women. Inside the club, women wear the covering clothing and headgear to conform to rules in Iran. Clocks for Tehran and Dubai, a half hour apart, hang next to pictures of Iran’s former and current supreme leaders, ayatollahs Ruhollah Khomeini and Ali Khamenei . ‘Absolute Sieve’ “You can get anything you want, and you can ship anything you want to Iran,” says Morteza Masoumzadeh, an IBC director and owner of a shipping company that transports goods between Iran and Dubai. “Every company in Iran is either here or has representatives here.” Lisa Prager , a partner in the Washington office of law firm Wilson, Sonsini, Goodrich & Rosati and a former deputy assistant secretary at the Department of Commerce , agrees. “Dubai is an absolute sieve,” says Prager, who has investigated smuggling in the emirate. Sultan Bin Nasser al-Suwaidi , governor of the U.A.E.’s central bank, and Saeed Abdullah Al-Hamiz , head of banking supervision, didn’t return e-mails or phone calls seeking comment. Hamad Buamim , director general of the Dubai Chamber of Commerce and Industry, declined interview requests. Yousef Al Otaiba, the U.A.E.’s ambassador to the U.S., declined to comment through a spokesman. ‘Aggressive Measures’ In an e-mail, the U.A.E. Embassy in Washington said, “The U.A.E. fully supports and enforces United Nations Security Council resolutions barring shipment of sensitive materials and technologies to Iran and is taking aggressive measures to enforce export-control laws that prevent the transshipment of illicit materials.” In 2007, Dubai imposed export-control laws designed to combat smuggling of military goods to Iran. The U.S. imposed economic sanctions on Iran in 1979 after followers of the late Ayatollah Khomeini held 52 Americans captive in the U.S. Embassy in Tehran. In its latest annual report on terrorism, published in April 2009, the State Department said Iran remained the world’s most-active state sponsor of terrorism. The department charged that Iran has funneled money and weapons to groups that have planted roadside bombs in Iraq. Since the summer, millions of Iranians have taken to the streets to protest the validity of President Mahmoud Ahmadinejad’s June 12 re-election. At least 50 have been killed and thousands detained. “The Iranian people have sought nothing more than to exercise their universal rights ,” U.S. President Barack Obama said on Dec. 28. “They have been met with the iron fist of brutality.” Profitable Trade Iran has frustrated Obama, the U.S. and the United Nations by pressing ahead with its nuclear enrichment program, in which uranium is converted into fuel that can be used for power plants as well as weapons. Obama has warned that Iran would face consequences if it failed to show its efforts were peaceful and transparent. Iran, which says its nuclear program is peaceful, spurned a deal offered by China, France, Germany, Russia, the U.K. and the U.S. to reduce its nuclear stockpile. Iran says countries see the value in maintaining their ties with the Islamic Republic, despite U.S. and UN sanctions. “Many countries have been under pressure, but they’ve made decisions according to their interests,” Shamseddin Hosseini , Iran’s economy and finance minister, said during an International Monetary Fund meeting in Istanbul in October. “The fact is that having a trade relationship with Iran is very profitable.” Abu Dhabi’s Role Abu Dhabi, the most powerful of the emirates by virtue of about $45 billion in oil exports in 2009, may flex its muscles to try to break up the Iran-Dubai connection, says Nader Habibi , an economics professor at Brandeis University in Waltham, Massachusetts . Abu Dhabi, which has always been suspicious of Iran’s political and nuclear ambitions, enjoys considerable leverage. In 2009, the emirate, which is about 16 times the size of Dubai, stepped in with a $20 billion bailout. The money included $10 billion for Dubai World, the state- run holding company that spent billions to carve out of the desert a financial hub and tourist destination. In a nod to the growing influence of Abu Dhabi leader Sheikh Khalifa bin Zayed Al Nahyan, Dubai renamed its 200-story Burj Dubai skyscraper the Burj Khalifa in January. The three Persian Gulf neighbors exist in an uneasy triad. Abu Dhabi follows a conservative Sunni religious doctrine that’s at odds with Iran’s Shia Islam. Political Tensions The government of Sheikh Khalifa, who’s also president of the U.A.E., disputes Tehran’s claim to three islands near key shipping lanes in the Gulf. Dubai tries to maintain a middle ground. It has cozied up to Abu Dhabi to ride out its debt crisis. Yet, with what the IBC says are 400,000 Iranians living within its borders — the largest concentration of the emigres outside Greater Los Angeles — Dubai can’t ignore its giant neighbor to the north. Thousands of Iranians travel to Dubai annually for a break from the Islamic Republic’s ban on alcohol and laws that require women to cover their hair and the shape of their bodies. Abu Dhabi, despite the bailout, is leery of Dubai’s freewheeling ways. “A likely price for Abu Dhabi’s help will be a greater centralization of the U.A.E. and less independence for Dubai,” says Eckart Woertz , economics program manager at the Dubai-based Gulf Research Center , which analyzes Middle Eastern policy. ‘Firmer Grip’ Abu Dhabi may push for U.A.E.-wide control of air and sea shipping, he says. Today, each emirate creates and administers many of its own laws, much as U.S. states do. “Abu Dhabi could end up with a firmer grip on implementation of sanctions policies against Iran, which would benefit the U.S.,” Woertz says. The U.S. has struggled for decades to make sanctions against Iran work. It has brought more than 20 cases against companies that it believes broke U.S. rules on exporting military or sensitive nuclear-processing material to the Islamic Republic. Kesh Air International in Novato, California; Limmt Economic & Trade Co. in Dalian, China; and Aviation Services International BV in the Netherlands have all used Dubai as a shipment destination for goods going into Iran, according to court documents. In April 2009, a Manhattan grand jury indicted Limmt on charges it had covertly used New York banks to finance large quantities of restricted materials for Iran. In May, Hassan Keshari , a naturalized U.S. citizen who owns Kesh Air, was sentenced to 17 months in federal prison after pleading guilty to conspiracy to export military aircraft parts to Iran. Banking Ties In September, Robert Kraaipoel, the director of Aviation Services, and his son, Robert Neils Kraaipoel, pleaded guilty to federal charges related to a conspiracy to illegally export aircraft parts to Iran. Both are citizens of the Netherlands. The U.S. has also tried to cut Iran’s access to the American banking system. The U.K.’s Lloyds TSB Bank Plc paid a $350 million fine to the Justice Department and the Manhattan District Attorney’s office in January 2009. According to the department, employees in Dubai and the U.K. had stripped identification tags from money transfers, allowing Iran, Libya and Sudan to send funds through the U.S. financial system. In December, Credit Suisse Group AG agreed to pay $536 million for violating U.S. sanctions and funneling millions of dollars secretly to Iran and other countries. Front Companies Some of the companies the U.S. is targeting set up shop in plain view of Dubai’s bustling docks. Less than 200 meters (650 feet) from Dubai Creek wharf, the grimy, five-story Bani Yas Center office complex served as headquarters for Iranian front companies, according to Alexander Acosta , a former U.S. attorney for the southern district of Florida and now dean of the Florida International University College of Law in Miami. On the ground floor, clothing stores with signs in English and Russian sell off-brand shirts, ties and shoes. In the lobby, the names of 30 trading and transport companies are written in white plastic letters on a black board. A single office here housed four Iranian firms that ordered microchips, computer parts and global-positioning-system devices from U.S. providers, according to court documents. The companies, with names such as Majidco Micro Electronics and Mayrow General Trading, had the electronics shipped to Dubai. From there, it was easy to forward the gear to Iran aboard an Iran Air flight, according to court documents. The Justice Department alleges in an indictment unsealed in September 2008 in Miami that the microchips found their way into roadside bombs in Iraq that were used against U.S. troops . Silent Partners While traces of the four firms had vanished during a visit to the center in October, hundreds of such front companies operate in Dubai, Wilson Sonsini’s Prager says. “We’ve figured it out and we made some cases, but it’s still a sieve,” she says. Iranians also gain a foothold in Dubai by setting up a business with a local resident acting as a silent partner. A U.A.E.-based company can better access lines of credit and import goods than one based in Iran. It’s a simple matter from there to ship the goods across the Gulf, IBC’s Masoumzadeh says. Residents can benefit from such deals. Under Dubai law, businesses must have an Emirati sponsor who takes a 51 percent stake. In return for acting as a silent partner, locals can earn a steady income, ranging from a few thousand dollars to more than $100,000 a year, the New America Foundation’s Molavi says. Deep Roots For more than a century, Persian-speaking Iranians have lived and worked in Dubai, which today has about 1.7 million people. The first Iranian merchants to settle arrived about 150 years ago. Another group emigrated in the 1930s to flee the modernizing edicts of Reza Shah , whose son, Shah Mohammed Reza Pahlavi , was overthrown in 1979. Others moved to avoid the religious extremism of the Islamic Republic that followed his rule. On this steamy October evening, people are enjoying kebabs marinated in yogurt and stews with pomegranate and walnuts at Iranian restaurants called Abshar and Ostadi. On Fridays, some Iranians attend the Shiite mosque with its green-and-blue glazed-tile facade, which is steps away from the Iranian Consulate. Amities Etemadi, an Iranian architect, came to Dubai in 1999 after graduating from the Islamic Azad University of Tehran. She visits Iran once a year for family reasons but considers Dubai her home, she says, sipping a Diet Coke at an outdoor cafe. In her short-sleeved T-shirt with her hair uncovered, she would be breaking rules in Iran that would earn her a jail sentence or a public lashing. ‘Don’t Take You Seriously’ “It’s difficult to work in construction projects in Iran because they don’t take you seriously as a woman,” she says. It was a different story in the 1960s and 1970s. While the shah encouraged Iranians to be cosmopolitan and Western, Dubai was no more than a village on the edge of the Arabian Desert. Its main industry was exporting pearls. As late as 1960, Dubai had no electricity, no roads, no bridges, no running water and no telephones, according to Jim Krane , author of “City of Gold: Dubai and the Dream of Capitalism” (St. Martin’s Press, 2009). Yet Dubai always had an underbelly that lured hustlers and smugglers, Krane says. Its waterfront offered easy access to the Gulf and to countries in the Mideast, Asia and Africa, and its laissez-faire attitude attracted people with subversive ambitions, he says. “Smuggling became an art form,” Krane says. Links to 9/11 Pakistani scientist A.Q. Khan organized a smuggling operation of nuclear material in Dubai, says David Albright , president of the Institute for Science and International Security in Washington. Khan, who developed Pakistan’s nuclear program, confessed in 2004 to shipping nuclear technology to Iran and Libya. Al-Qaeda used the emirate’s banking system to transfer funds, according to the 9/11 Commission report , which investigated the attacks on New York and Washington. About half of the $250,000 spent on the Sept. 11 attacks was wired to al- Qaeda terrorists in the U.S. from Dubai banks, the commission found. The U.S. government says getting Dubai to cooperate is crucial to its effort to rein in Iran. Treasury Undersecretary Stuart Levey, the U.S. point man on financial sanctions against the Islamic Republic, has shuttled to Dubai more than a dozen times. “I’m aware that Dubai has deep historical ties to Iran,” says Levey, seated in his fourth-floor office in Washington. “They want to be part of the global trading and be a financial center. They see the potential reputational risk that these ties with Iran pose.” Treasury Blacklist The Treasury Department has designated 119 Iranian companies, banks and officials as supporters of Iran’s nuclear or terrorist activities. It has placed them on a list that bans them from having any dealing with U.S. companies and that allows the U.S. to seize their assets. In 2006, the department announced sanctions against Bank Saderat , one of Iran’s biggest lenders, for transferring funds to Hezbollah, the Lebanese Shia paramilitary group. The Treasury listed Bank Melli , Iran’s biggest bank, the following year for funding Iran’s nuclear program. The State Department took aim at the U.A.E. in 2007. It threatened to designate the emirates as a “destination of diversion concern,” a label applied to countries that send sensitive nuclear technology to Iran. The classification would have meant that U.S. customs officials would start giving more scrutiny to exports to the U.A.E. Dubai agreed to enact its own stringent laws, which among other things, ban the export or re- export of strategic goods like military hardware without a special license. Dubai Gets Tough Since then, Dubai customs agents have shut down at least 30 local companies, according to the U.S. Commerce Department. Last August, U.A.E. customs investigators intercepted and seized a North Korean ship carrying weapons to Iran. Levey has repeatedly warned banks in Dubai against dealing with Iran. In November 2008, the Treasury further tightened restrictions by revoking a special financial arrangement referred to as a “U-turn license.” This measure in effect prevents U.S. banks from making dollar transfers to Iranian banks or other financial institutions even if the transfers are on behalf of European or Asian companies. “Levey is trying to paralyze Iran, but Dubai is Iran’s biggest trading partner and it won’t be easy,” says Abbas Bolurfrushan , a former president of the IBC who runs an insurance company specializing in shipping. “Iran has experience in getting around sanctions.” Clean Companies From his 19th-floor office in the Radisson Hotel, Bolurfrushan can see Dubai Creek and the dhows brimming with appliances, food and clothing. He left Iran in 1982 after the government nationalized the insurance industry. He set up his own company in Dubai. He says Emirati customs officials are becoming stricter with businesses they think belong to Iran’s Revolutionary Guards, the branch of Iran’s military that controls its borders. “The majority of Iranian companies here are clean and have nothing to do with smuggling weapons or material for the nuclear program,” Bolurfrushan says. “Dubai’s security forces have put Iranians under the microscope.” Esfandiar Rashidzadeh says he has felt Dubai’s tighter regulations. In 2004, Rashidzadeh, the former vice governor of Iran’s central bank, set up an affiliate of Iran’s Bank Melli in Dubai. He wanted to attract foreign investors to a fund called First Persia Equity Fund that invested in Iran’s stock market . Americans can’t invest in the fund. In March 2009, the Treasury added Rashidzadeh to its blacklist. ‘Better Intel’ Trouble is, Rashidzadeh says, he’d left the Bank Melli affiliate 18 months before the Treasury’s move. “They need better intel,” he quips, saying the worst consequence of the American action was missing a relative’s wedding in the U.S. Rashidzadeh says U.S. sanctions are unlikely to sway Iran’s policies — but they may make it more expensive to conduct business there. “Their pressure will not change regime behavior but add to the cost of doing business,” he says. “We’ve survived sanctions before.” Stephen Austen , a former managing director of the same investment fund, counters that sanctions are hurting. Austen, who had worked at Lloyds Bank Plc and Goldman Sachs Group Inc. , was one of the fund’s managers in the Cayman Islands and later in Dubai. ‘Sanctions Are Biting’ Austen says U.S. efforts against Iran are frightening potential investors the nation needs to fix its aging oil fields and improve its natural gas production. A lack of machinery and spare parts is hurting Iran’s car industry, he says. Iran is also having trouble getting financing, Austen says. “The U.S. has successfully barricaded Iran from the international capital markets,” he says. “The Iranian government does not want to admit that the sanctions are biting, but they are biting very hard.” That assessment is good news for Levey, who’s unlikely to ease his scrutiny of Iran — or his prodding of Dubai. “Abu Dhabi is going to apply pressure on Dubai to limit its dealings with Iran,” Brandeis University’s Habibi predicts. “Abu Dhabi is no friend of Iran.” With Abu Dhabi in the mix, the U.S. may have finally found a regional ally in its struggle to persuade Dubai to firmly shut Iran’s back door to the West. For Related News and Information: To contact the reporter on this story: Kambiz Foroohar in New York at kforoohar@bloomberg.net