Raymond Barrett

Foreign Policy
By Raymond Barrett

A key to understanding the history of Dubai’s seamy underbelly.

The wooden dhows docked along the Dubai Creek sail trade routes that are centuries old, connecting this small city-state on the Persian Gulf with the outside world. But the boats have served a double purpose in Dubai’s history. A symbol of Dubai’s vibrant shipping industry, the dhows have also been used by generations of smugglers exploiting Dubai’s strategic position between East and West to move contraband back and forth across the Arabian Sea. Now, despite Dubai’s recent rebranding as an international hub for finance and education, it remains a hub for the darker side of the global economy, with modern-day smugglers using Dubai as a base for everything from property-based money laundering and illegal banking to the Afghan opium trade.

Dubai’s struggles during the global financial crisis will only strengthen its underworld, according to Christopher Davidson, a lecturer in Middle East politics at Durham University and the author of Dubai: The Vulnerability of Success. “As Dubai’s efforts to fully liberalize its economy come undone and its attractiveness to foreign investors declines further, the international spotlight will eventually move away and it may become more attractive than ever to human traffickers, gunrunners, and money launderers,” he says. Dubai’s new smugglers may be Indian mobsters or Chechen strongmen instead of dhow sailors, but the old dual structure of legitimate and illegitimate business remains robust.

The necessary ingredients for a thriving underground economy were present in Dubai from the start. Unlike the oil-rich Gulf sheikhdoms of Saudi Arabia and Kuwait, Dubai — one of seven self-governing entities that constitute the United Arab Emirates (UAE) — was not built with petrodollars, or at least not directly; oil accounts for around 5 percent of the emirate’s economy. Instead, Dubai’s supercharged development strategy was property-driven, fueled by a tsunami of cheap credit and excess liquidity. Semipublic corporations with close links to the ruling Maktoum family borrowed an estimated $80 billion on global capital markets to fund iconic developments such as Burj Dubai and Palm Jumeirah. But as Dubai went in search of investors, it found some unsavory elements as well.

Laundering money through the city’s booming property market was relatively simple. Property paid for in cash could be quickly resold, often before the development broke ground. The vendor would then receive a check redeemable anywhere in the world. However, as Dubai’s property boom crashes — the Dubai Khaleej Times reported drops of up to 50 percent in prices in 2009 — experts like Davidson see signs of a change in strategy by the local authorities, with an increased focus on putting corrupt businessmen on trial, especially foreigners. Still, despite the added attention, a large number of developments sit empty, owned by investors instead of occupiers. And the fact that criminal elements may own large amounts of property in Dubai means that the real estate market will still be tainted with illegality.

Dubai’s unregulated economic markets have also offered a safe home for dubious financiers and shadowy entrepreneurs. Just this month, a local group of Iranian businessmen was named in a U.S. indictment relating to the illegal export of U.S. military aircraft parts to Iran. And Dubai might soon be forced to make some tough decisions about how much to police its resident white-collar criminals. At the recent G-20 meeting in London, world leaders called for a crackdown on tax havens like the Cayman Islands and Liechtenstein — and Dubai. But this puts Dubai in a bind: If the new Dubai International Financial Centre adopts stricter regulations than its neighbors, Bahrain and Qatar, it could lose much-needed business. Dubai must either continue with its laissez-faire attitude toward international financial regulations and risk pariah status, or adopt more stringent monitoring practices for its banking system and risk financial collapse. If the past is any hint, however, Dubai is not likely to accept regulatory measures that trim back growth, no matter how sublegal that growth may be.

Of all the black arts practiced in Dubai, none is more dangerous for the current U.S. administration than the “Afghan Connection.” Since 2003, poppy cultivation in Afghanistan has more than doubled, and a U.N. report valued the opium trade at $4 billion in 2007. A good deal of this money is coming to Dubai. John Cassara, a former CIA officer and author of a recent book on terrorist financing, describes how Dubai is used as a clearinghouse for opium profits: Afghan drugs lords swap opium for luxury European vehicles, and drug shipments are paid for not in cash but with commercial goods such as building materials, electronics, and foodstuffs that are bought in Dubai and shipped to Afghanistan. According to Cassara, such transactions are “difficult to find, a proverbial needle in a haystack.” Dubai officials don’t help, either: Cassara accuses the authorities in Dubai of “willful blindness” when dealing with this hidden trade.

Thanks to its financial laxity, plus the lack of extradition agreements and the luxurious lifestyle, international underworld figures have flocked to Dubai. Dislodging them may prove difficult, as many operate under the protection of their respective governments. This is especially true when dealing with states from the former Soviet Union, East Africa, and South Asia. Except for those rare high-profile criminals like Mumbai underworld chief Dawood Ibrahim or alleged arms dealer and “merchant of death” Viktor Bout, who simply became embarrassments, fugitives from justice are only rarely forced out of Dubai. And their presence has brought a new level of violence to the normally very safe emirate. Recently, a former Chechen rebel commander was gunned down in the parking lot of a luxury apartment block — the result of an ongoing power struggle between groups involved in Chechnya’s wars with the Russian Federation.

If Dubai is to mend its ways, the impetus will have to come from outside — and it will have to be coupled with significant pressure. In the past, Dubai has generally only paid lip service to U.S. demands to tighten sanctions on Iran or regulate the hawala transfer system. Cassara says, “The authorities do enough to get the West off their back, but no more. What is particularly lacking is initiative, enforcement, and the political will to go after their own. Until all of those happen, nothing will change.”

Abu Dhabi could help. This most powerful emirate in the UAE recently bought $10 billion of Dubai government bonds and may yet buy another $10 billion. A bailout-by-another-name, the move gives Abu Dhabi significant leverage over its smaller neighbor and could be a backdoor channel for those seeking to effect a change in policy from Dubai’s ruling family. It was telling that in the wake of this bailout, Dubai quickly announced new guidelines regarding personal behavior and dress for expatriates outside the city’s tourist resorts — a possible sop to Abu Dhabi’s religious conservatism.

By embracing the deregulation and openness so fervently preached by Western governments, Dubai is now a nexus for both money and people from across Asia and Africa seeking to connect with the global economy. Because this global economy works underground as well as in the sun, it’s inevitable that Dubai should keep a hand in both. In recent days, reports have emerged in the London Independent that ransoms paid to pirates hijacking ships off the Somali coast may have been partially laundered through Somali businessmen based in Dubai, among other places. Sound familiar? It’s been part of Dubai for as long as the dhow has.