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.