At a bustling tobacco trade fair in Dubai business is brisk. In a large hall near the near the shimmering Burj Khalifa skyscraper, buyers examine cigarettes, raw tobacco leaves and the latest vapes, before negotiating deals with the sellers.

But the real business takes place 45 kilometers south from here, in the Jebel Ali free trade zone, a vast dusty industrial site stacked with factories and warehouses adjacent to one of the world's busiest blue water ports. A custom-controlled site, visitors need special passes to access the free zone, while many of the goods produced here are exported immediately, never passing through the UAE domestic market.

Here more than 20 factories are churning out cigarettes in their billions, and other tobacco products. It's big business: In 2018 the UAE exported cigarettes worth €3 billion ($3.34 billion, 12 billion dirhams), making it the country's third-biggest nonoil export behind gold and raw aluminum.

But according to international agencies and numerous reports, much of what is produced in the Emirates is destined to be smuggled into overseas markets and sold illegally without tax.

Considerable losses

In Europe, cigarette smuggling and other forms of illicit trade in tobacco products are estimated to cause a €10 billion loss to the EU and national budgets every year, says the European Anti-Fraud Office (OLAF).

Illicit cigarettes in the EU come from a variety of sources, and can even be manufactured inside the EU in illegal factories while internationally, cigarettes are sourced across East Asia. But two countries — Belarus, on the EU's eastern border and the UAE — stand out.

"Smuggling of Belarusian cheap whites and transit and illicit production activities in the free zones in the UAE remain of particular concern," said an OLAF spokesperson.

A study of the Maghreb region carried out by KPMG concluded that of the 13 billion contraband cigarettes consumed there in 2016, 7.4b billion —well over half — were believed to originate from trademark owners based in UAE free trade zones.

Cigarette factories can also be found in a handful of other free zones around the world, but the UAE is believed to be the world leader, with one estimate putting production in the free zones at 60 billion cigarettes a year. "Essentially this is the biggest concentration of free zone manufacturers in the world here," says Andy Carter, an investigator with Japan Tobacco International (JTI), one of the big tobacco companies whose sales are affected by illicit trade.

"Everybody knows that [the cigarettes they produce here are] manufactured for smuggling," Carter told DW in an interview in Dubai. "But they're manufactured quite legally, and it's only probably at the point of entry that the consignment documents are flipped, and it all becomes toys or furniture."

Carter is referring to what is known in the industry as "illicit whites" or "cheap whites:", that is cigarettes that are sold into some markets through legitimate supply chains, but which are also smuggled in vast quantities into other markets and sold there illegally, without tax.

The cigarettes often have names that mimic established brands, and may be of high quality, even manufactured in state-of-the-art factories, though testing of some illicit cigarettes in the UK has also found traces of arsenic, pesticides and rat poison.

One UAE-based expert told DW that the majority of the production that takes place in free zones in the UAE may be entirely lawful, but that the issue is "not straightforward."

What about stricter controls?

If the production is completely legal in the UAE, then "It may be that really what is needed is better controls in relation to what is imported into the country of destination," said the expert, who declined to be named citing political sensitivities.

But if illegal activity is taking place within free zones, one factor is that people in the trade are "very smart at avoiding enthusiastic law enforcement," he said. "There is possibly also a lack of application of law enforcement powers that is also contributing to some of that activity continuing," he said.

German customs officials confiscate milions upon millions of smuggled cigarettes every year

A representative from the Jebel Ali Free Zone Authority (Jafza) did not respond to requests for comment.

JTI's Carter says that while the UAE authorities are very helpful when it comes to combating counterfeit cigarettes, but when it comes to the illicit whites it's a different story. Even when there is evidence that companies are "playing games," such as shipping out used tires and declaring that they are cigarettes to balance their books (used tires have a similar weight), authorities are typically unwilling to take action, says Carter. "The authorities seem reluctant to upset the apple cart," he says.

Authorities are also often reluctant to share information on companies operating in the free zones with international authorities — information that could help with cross-border investigations of supply chains, said Howard Pugh, head of Europol's excise fraud team, dealing with tobacco, alcohol and oils.

Local free zone manufacturers contacted by DW denied any knowledge of illicit sales. Rajesh Rohra of Global Tobacco FZCO, a manufacturing company based in the Jebel Ali free zone which produces brands including Richman that have been seized in their millions by customs authorities in Europe, denied any knowledge of how his company's products could end up being smuggled, even suggesting that the Richman brand may itself have been counterfeited.

The representative of another company, Orchid Tobacco, said its products are mainly sold in Europe and Russia, but that they sell their cigarettes to traders, who in turn sell it to local distributors. "We are dealing with traders," he said.

But Carter believes that factories that are selling cigarettes which are then smuggled are fully aware of what takes place. He says they've even seen marketing material such as umbrellas or carrier bags supporting a cigarette brand in a country where that brand isn't legally sold.

Huge profits

While Hollywood movies often portray the dangerous world of drug smuggling, the illegal cigarette trade is not similarly glamorized. Still, with a single pack of cigarettes costing as little as 20 cents to manufacture, the profits can be enormous. A container load of cigarettes bought for anywhere between €50,000-€150,000 can be sold in the EU for as much as €1.5 million, says Pugh.

Meanwhile, compared with selling drugs the penalties for cigarette smuggling are paltry. Law enforcement officers will typically need to add charges such as money laundering or tax evasion to make the penalties have more teeth, notes Pugh.

The dirty money from illicit cigarette sales creates problems of its own, bolstering organized crime groups in the EU who will resort to violence to protect their businesses — including beatings and murder — as well as corruption, extortion and money laundering he says.

There have also been links to funding of terrorism, including in Bulgaria, where a shisha factory was being operated by two former "Islamic State" commanders, before being raided in 2016. Terror groups have also been known to smuggle cigarettes to earn income.

"Cigarette smuggling is a source of revenue for organized criminal groups from Europe and beyond, and there are indications that in some instances it is also linked to financing terrorism. Fighting the illicit tobacco trade is therefore also key to protecting the security of the EU," said the OLAF press office in response to emailed questions.

Free zones implicated in smuggling

To bring cigarettes into a market such as the EU illicitly, traders often pay a cat-and-mouse game with customs authorities, moving products from port to port — favorites include Port Said in Egypt, Misrata in Libya, or Famagusta in Northern Cyprus where they may be unloaded and repackaged, making them difficult to trace. Weakening of governance structures in countries such as Libya has also facilitated smuggling across the Mediterranean.

The OECD is currently studying options for clamping down on illicit trade through free zones, which — despite their attraction for smugglers — are seen as vital cogs in the wheels of international trade, creating jobs in both developed and developing nations.

The Jebel Ali Port is itself a noted transshipment hub for illicit cigarettes and for counterfeit goods. In 2018 the World Customs Organization (WCO) carried out an intelligence operation to tackle "diversion and misdeclaration (switching) of tobacco consignments as they moved through free zones."

The UAE is also amongst the worst countries when it comes to counterfeit and pirated goods more generally. A 2016 report from the OECD noted that the UAE was the third top "provenance economy" of counterfeit goods entering the EU between 2011-2013, behind only Hong Kong and China.