Direct donor funding of sectoral budgets, rather than the general budget, sending too much money within short time frames, inadequate financial controls, high-level collusion and handling of offenders with kid gloves were the key causes of incessant fraud, envoys say.
Their revelation comes in the wake of the sh40b Office of the Prime Minister (OPM) financial scandal, where aid from countries, including Ireland, Norway, Sweden and Denmark for the Peace Recovery and Development Plan for Northern Uganda was misappropriated.
The envoys and experts also propose solutions that they believe can plug the loopholes, including auctioning offenders' property, developing watertight financial controls and killing the corrupt in public like it is done in other countries.
Joachim Duster, the deputy head of mission at the German Embassy in Kampala, says Germany channels its budgetary support to Uganda through the finance ministry and the money goes to the general budget, whose allocation is scrutinised and monitored by Parliament.
"This is not to say that such money cannot be misappropriated, but it goes through complex budget monitoring. But when donor funds go to a specific sector like the money that was sent to the OPM, a few people can decide what to do with it," he says.
Duster added that most of Germany's project aid is channelled through agencies like GIZ (Germany Agency for International Cooperation), which they closely and periodically evaluate, leaving little room for misappropriation.
The diplomat said donor countries have agreed with the Ugandan Government to put in place financial reforms as a pre-condition to resuming the disbursement of budget support.
"Ugandans should rise up and collectively fight corruption because it is an obstacle to development and investment."
Duster stressed the need to strengthen the already existing institutions like the Inspectorate of Government and the Auditor General.
"These institutions need to be accorded the necessary resources and knowledge to detect fraud by, for instance, putting in place an efficient computerised system," he observes.
Like in Uganda, Duster observed that Germany also has institutions like the General Audit that check on misappropriation of public funds.
In Germany, Duster noted, the culture of resigning has been deeply entrenched once a leader is implicated in suspicious behaviour.
"One does not have to be guilty. Once you are implicated as a leader, you step down to pave way for investigations. It is usually institutions like the media and civil society that push for a leader's resignation. As a result, leaders in Germany stay away from bad practices."
Colum Hatchell, the second secretary at the Irish Embassy, says they have already highlighted the loopholes and solutions in several reports posted on their website of the Department of Foreign Affairs.
According to an interim report on the misappropriation of funds in the OPM by the Irish embassy's evaluation and audit unit technical team, sophisticated and elaborate high-level collusion at senior levels abets fraud.
The report noted that collusion in the three key agencies that handled the funds: OPM, finance ministry and Bank of Uganda made it difficult for normal systems to detect the fraud as key controls were bypassed by the individuals who were responsible for implementing the controls.
The report also notes weaknesses in the financial control system, where bank reconciliations are not done timely.
The failure to close dormant bank accounts is also another loophole through which civil servants divert funds. In the OPM scandal, dormant accounts were allowed to remain in place, despite the Auditor General's regular reminders to close them.
To avert future fraud, the Irish foreign affairs minister, Eamon Gilmore, says they would now directly oversee the donor funds, instead of leaving the task to the Government.
"I have instructed my officials to undertake a review of all management, monitoring and control systems across our bilateral programmes to ensure that risks are being appropriately identified and managed.
Every possible measure to minimise the risk of future fraud will be put in place," Gilmore says. When Uganda refunded the £4m (sh17.3b), Gilmore noted:
"Looking to the future, we stand ready to continue to work with the Auditor General of Uganda in his efforts to root out corruption, strengthen financial controls, and build robust and transparent systems of accountability."
Local experts speak out
Morrison Rwakakamba, a public policy analyst, concurs with the envoys on a loose financial control system in Government.
He recommends tightening checks and balances to fight corruption, arguing: "Whether it is donor funds or taxpayers' money, thieves will remain thieves."
Rwakakamba calls for a more open approach involving the beneficiaries, right from the time of disbursement to implementation, coupled with regular followups.
"Once there is no pressure on civil servants, they steal with impunity." Prof. Augustus Nuwagaba, a consultant with Reev Consult, says civil servants easily steal money because there are no serious punishments given to thieves.
"When you steal and the Government pays back, like it was the case with the £4m to the Irish government, it encourages impunity. The Government should tell us where they got that money because it is unfair to refund stolen funds using taxpayers' money."
Another loophole, Nuwagaba says, is that there is a lot of donor funding coming into the country without properly streamlined programmes intended for it.
"Public servants are being forced to absorb huge sums of money in short periods. So, rather than return it to donors, they fabricate ways of absorbing it."
He adds that the Government's monitoring and coordination units lack a focus as each of them assumes the other is doing the job. He asserts that the only way corruption can be averted is by making it very expensive and risky.
He cites countries like China, South Korea and New Zealand, where the penalty for stealing public funds is death. "In China, they have a firing squad every first Friday of the month for the corrupt.
In New Zealand, the corrupt are stoned to death while in South Korea the corrupt are shot." Nuwagaba reiterates the envoys' feeling that the property of the corrupt should be confiscated and auctioned, on top of dismissing them with disgrace.
Nuwagaba believes Uganda can survive without donor funding, arguing that Kenya did it between 1990 and 2000 and that the country currently balances its budget up to 98%. "Today, Kenya has one of the biggest budgets in Africa.
I believe we can sustain ourselves if locally generated funds are properly utilised and corruption is fought. Development is initiated from within. If external funding does not come, we shall be forced to think hard for revenue sources."