Paterno knew, and he essentially fired the guy. It's likely the reason he fired him.
Anything that happened after was while Sandusky was not under the employ of Paterno. It is entirely possible that Paterno was disgusted with Sandusky, didn't want him around, and when McQueary came to him in 2002, he went to the brass and basically said, "I told you fuckers, now do something about it". It seems like the brass was more interested in covering up for Sandusky than Paterno ever was. The question I want answered, is why? And what exactly was the dynamic of the Paterno/Sandusky relationship after 1998, and after 2002? Remember, 1998 was mearly an allegation. You can't judge anyone on what we know now. He fired the guy based on an allegation. The school banished him in 2002. What I want to know, is why was he still hanging around?