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.