Why did they arrrest General Bache?
Bache did not shoot the kid. The drunk redneck who jumped Bache grabbed Bache's gun from the holster and shot his friend. It is very clear in the movie.
Watch the scene again. The shot that kills the kid doesn't come from Bache's gun, but from far away.
The "redneck" (who's actually highly educated, probably French) and Dwyer are staging the entire thing. Moreland knows this from the get-go, but doesn't figure out why until his conversation with his "father" (who, of course, is not his father, but a fellow Mossad operative).