Big Red Flag...
I have worked overseas, and HAVE had my passport taken from me on several occasions... Mostly in middle eastern countries. My avitar is what Libya gave me in exchange for my passport.
I would call the US embassy, or Email them and let them know that an organization in UAE has threatened to take an illegal action towards you as a US citizen working abroad. They might check to see if there are currently any US citizens who have had their passport detained and warn them that it is indeed illegal.