Ten years before Season 1, at the Battle of the Line, Sinclair had tried to ram a Minbari ship with his starfury - and they'd taken him aboard, instead.
Suddenly, an inch from annihilating all people on the planet, the Minbari had surrendered. A day later, they released Sinclair, turned around and flew away.
In his testimony, Sinclair claimed to have no memory of what occurred on board the Minbari ship. And his ship's computer provided no evidence, either - the Minbari had entirely deactivated it. His screens had gone black. There was no data. None.
Logically, he should have offered to be scanned. Potentially, a scan could reveal more details about the missing day. His superiors asked him to agree to be scanned. He steadfastly refused.
As a normal, he couldn't be compelled to submit. Dead end.
The Earthforce brass and senators who had been debriefed of the situation remained divided on the reasons for Sinclair's mysterious amnesia.
Camp 1: He's a liar.
To these folks (as seen in "And the Sky Full of Stars"), Sinclair was flat-out lying to EarthForce. He knew damn well what happened on that Minbari ship, and he was feigning amnesia because he made some kind of "deal" with the Minbari, agreeing to sell Earth out at some later date if the Minbari released him unharmed. He was refusing to be scanned because he knew he was lying.
Maybe, they reasoned, the Minbari had decided that an all-out frontal assault on Earth would be too costly, and so they had decided on a more subtle approach. They would conquer the planet "quietly," in stages. They would make "peace" with Earth and remove their warships. Minbari would move to Earth, buy up real estate and businesses, and file lawsuits when humans expressed prejudice against them. Indeed, more and more aliens were moving to Earth and buying property, and alien history was now taught more than ever in Earth schools. The Minbari would support or even help fund the Babylon Project in the name of peace, but it would be a ruse - they would make sure that "their guy," Jeffrey Sinclair, was appointed as its commander. Slowly, he and others like him - a quiet "fifth column" - would sabotage Earth's interests from within.
Does anti-alien racism fuel this concern? Yes, but that's not the only thing driving it. These people are also hella scared of Sinclair and the danger he could pose to Earth if he's actually a Minbari agent. Since these people have no "good explanation" for either the end of the war or Sinclair's amnesia (no one does), they see these occurrences as linked, and linked in a nefarious way.
Again, their fears must be understood in the context of the "mock execution" Earth underwent at the hands of the Minbari (i.e. the "surrender" was actually a form of psychological torture, in impact if not in intent as well), and in the context of the many thousands of human casualties over the course of the three-year war.
As the line goes from the pilot: "…and the sky was full of stars, and every star was an exploding ship — one of ours."
Camp 2: Sinclair's a compromised officer, programmed by Minbari telepaths.
To others, Sinclair was telling the truth - he didn't remember what happened on board the ship. This could easily and logically be explained as the work of Minbari telepaths. The Minbari had telepaths strong enough to have erased Sinclair's memory of that day. It wouldn't be hard to do.
Anyone substantively aware of the classified practices by which Psi Cops contain the threat of rogue telepaths (and protect the public from terrorism) would be aware that the Corps sometimes used "sneaky" tactics to infiltrate and break up rogue cells. The existence of special prisons for telepath prisoners is public knowledge (and always has been - telepaths have never been housed in the same prisons as normals, and prisoners suspected of telepathy are transferred out of normal prisons when they are identified). The existence of "re-education camps" for telepath prisoners is also not much of a secret, even if it's rarely talked about. But the Corps doesn't always send captured rogue telepaths to re-education or prison camps - sometimes they tweak with the prisoners' minds, alter their memories, and let them go.
In these cases, the Corps changes as little as possible, to minimize the chances of detection. And they implant memories consistent with what the captured rogues believe would happen to them after capture.
They would think they had been held in a cell, they would think they had been roughed up, they would think they had been denied food - and they would think that they had escaped, through their own ingenuity and the help of an "insider" who sympathized with them.
These rogues eventually find their way back to their old units or rejoin new ones, all the more eager to resume their fight and kill their own people. Done right, the changes to their minds are hard to detect, even on a deep scan - but tweaked, these rogues would never let their old comrades scan them, anyway.
And so it remains, until something happens that triggers the program. Maybe a Psi Cop establishes line of sight and 'casts a certain glyph to them. Maybe a certain event (such as an impending attack on a Corps or normal target) triggers the change, and causes the rogue to flip, sabotage the attack and turn his or her comrades over to the Corps.
In other cases, there is no "switch" built in - perhaps the changes are very slight, and make the captured rogue more paranoid, more prone to arguing with comrades, less inclined to trust others. These traits cause discord and dysfunction in the cell, while arousing no serious suspicion - the personality changes can easily be attributed to all to the trauma of having been captured by the Corps. Nonetheless, this formerly captured rogue could still disrupt the smooth functioning of the cell. He or she may make more mistakes, may mess up terrorist plots through incompetence, sloppiness, or "human error" - a carelessness that others would again attribute to factors other than reprogramming. Meanwhile, plans to kill others (normals and/or telepaths), or other criminal plots, would have failed.
Or perhaps the changes would be even more subtle - perhaps this rogue would just quietly slip off once a week or once a month and inform the Corps of the cell's activities, having no memory of ever doing so. Such a person could stay in contact with other rogues for years - fighting with them, funding them, assisting them indirectly - entirely unaware that he or she was actually working for the Corps as well.
These programs are all very highly classified - junior Psi Cops and those without the proper clearances don't know this goes on (though they may have heard rumors). This is one of the lesser-known ways the Corps keeps the normal public safe.
It's a form of sacrifice: Some must be sacrificed if all are to be saved.
Now, the folks "in the know" about these programs (normal and telepath alike), who also know about Sinclair's mysterious amnesia, would naturally link the two. Why else does he have amnesia? Why else would the Minbari have vetoed everyone on the list for commander, till they got way down the list, to him? Why else would they have conditioned their participation in the Babylon Project on his being appointed as commander?
Psi Cops would certainly have informed the high-ups (Clark, the Joint Chiefs, the EarthForce brass) - off the record, of course - that any of these same clandestine tactics, as used by Psi Cops to take down rogues, could have been similarly used by the Minbari on Sinclair. (Perhaps the Corps had even contemplated using such tactics on captured Minbari prisoners, as part of the secret rendition program on Ganymede. It seems unlikely to have been carried out, however, because how would the captured Minbari get back to their units?)
If "Camp 2" was correct, maybe Sinclair really didn't know what happened on board the Minbari ship - but that didn't make him any less dangerous. Maybe he really didn't remember that day, but he only had amnesia because the Minbari telepaths didn't know enough about human minds to be able to recreate plausible new memories for him to fill in the hole. So they'd just left him with amnesia.
The Minbari, they worried, might be planning to "flip him" later. Internal Affairs could interrogate him and his people all day, but there would be nothing suspicious to find - not yet. And the interrogations would only tip off the Minbari that Earth was expecting the trap.
Internal Affairs decided to proceed anyway, and to bring along a telepath.
As a footnote, it should be added that the same tactics described above - capturing a telepath, scanning him, and releasing him with altered memories - are used by Bester to obtain intelligence on Clark et. al.'s conspiracy with the Shadows, and then later (on Garibaldi) to foil Edgars' plot to kill and/or enslave all ten million human telepaths on Earth and Mars with a Shadow-tech engineered virus. Consistently throughout canon, these tactics are used to keep normals safe from rogue telepath terrorism, to try to disrupt the Shadow takeover of EarthGov, and to prevent mass genocide/enslavement of telepaths at the hands of an ultra-wealthy psychopath. Bester uses such tactics to obtain intel on the Shadow conspiracy and later to assassinate Johnston (who is colluding with the Shadows). There is absolutely no evidence of the Corps ever using such tactics to "take over EarthGov" or to try to enslave/conquer/harm the normal population.