Jamie Walker – According to the army, it began as a Melbourne Cup day joke. Hot and bored, a group of Australian soldiers spotted two Timorese boys herding water buffalo along a sun-blasted street fronting the Battalion Support Group compound in Dili, East Timor.

A private wrapped a US dollar note around a rock and threw it to the children.

What transpired next would set soldier against soldier, stir suspicion of a cover-up and force action from the highest level of army command in Dili, and, 10 months on, continues to cause ructions.

Military police have dubbed it "Buffalo-gate" and the conspiracy theories have been given weight by the destruction of a videotape of one of the prepubescent boys pretending to – or actually – performing obscene acts on a water buffalo, with the encouragement of the onlooking Australians.

At least six soldiers from the frontline 2nd battalion Royal Australian Regiment were involved in the incident on November 6 last year. Two of them, the private who provided the dollar bill and the other with the video camera, were charged with prejudicial behaviour.

In the first instance, they received what amounted to a slap on the wrists: four days' restriction of privileges, denying them canteen visits and their beer ration. The army says neither man was responsible for inducing the Timorese boy to behave improperly.

The child had been paid to "ride the buffalo like a horse", apparently in the high jinks of Melbourne Cup day, insists Director of Personnel (Operations) Colonel Terry McCullagh. As he did so, one of the soldiers fetched his camera and began videoing.

The evidence after that is "contradictory", Colonel McCullagh concedes.

A lieutenant who saw the tape, but did not witness the incident, says it showed the boy lifting the animal's tail and pretending "as if he was sticking his hand into the anus".

Other witness statements refer of the boy having his hands in proximity of the buffalo's "backside", and of his fondling its "udders".

Colonel McCullagh says the conclusion of the lieutenant – the men's platoon commander – was that the child may have been "hamming it up" for the camera.

"In my opinion, the video did not show any lewd, distasteful acts, and it did not depict the rumours as told to me," the lieutenant says in his written statement. From the audio, however, he could hear the watching troops laughing.

Colonel McCullagh says it would be "fair to say that the boy was encouraged to continue what he was doing ... by the soldiers".

Some of their fellow Diggers didn't see the joke when the video was passed around the compound. Complaints were made and on November 22, the two privates pleaded guilty at a disciplinary hearing.

Evidence was not heard from the boy; he could not be identified or traced.

The penalty was reviewed and confirmed by an army legal officer in Dili on November 30.

And there the matter should have ended – except that rumours began flying of a fix, fuelled by the fact that the military police had not been called in to investigate. It didn't help that the videotape had been returned to its owner, who promptly destroyed it.

Word reached the Australian national commander in Dili, Colonel David Chalmers, who referred the case to the military police.

But as sources familiar with the investigation point out, the key piece of evidence – the videotape of the incident – was by now beyond reach.

Colonel Chalmers considered sending the miscreant soldiers home but, finding the case had been handled according to law, settled for a further warning.

He also sent a rocket to the battalion HQ, reminding commanding officer Lieutenant-Colonel Angus Campbell of the reporting and management protocols.

Colonel McCullagh insists the file is now closed, but it has left a stale taste, especially among MPs who believe they should have been involved earlier in the process.

"I think there is a suspicion in many minds that there was a strategy from the outset to deal with this matter quietly, and that meant the video was never going to be adduced into evidence," says one.

Colonel McCullagh denies this, saying: "There is no error in law by the tape being destroyed."

He maintains the case is isolated and does not reflect on the general state of discipline among Australian troops in East Timor.