In section 301(c) of the 1961 Foreign Assistance Act (PL 87-195) as amended, Congress has directed that "No contributions by the United States shall be made to [UNRWA] except on the condition that [UNRWA] take all possible measures to assure that no part of the United States contribution shall be used to furnish assistance to any refugee who is receiving military training as a member of the so-called Palestine Liberation Army or any other guerrilla type organization or who has engaged in any act of terrorism."Apparently, organized Palestinian Arab terror predated the PLO by a few years, enough so for the US to recognize that it was potentially funding terror by funding the UNRWA.
In 2003, this law was dusted off and the General Accounting Office started making reports as to whether UNRWA funds are going to terrorists. So far, from what I can tell, the results have officially been too inconclusive (or perhaps politically inconvenient) for them to make that determination, so the funding continues. UNRWA's response was pretty much "hey, we don't ask the people we help if they are terrorists." But from the definition above, even that is inadequate - the law stipulates that the UNRWA take "all possible measures" to assure that no "refugees" who are members of terror groups get any help.
In addition, Israel informed the US of actual employees of UNRWA who had been convicted of terror activities, and while it is noted in GAO attachment 5, it did not stop the US from continuing to fund UNRWA.
It seems pretty clear that by continuing to fund UNRWA, the US is effectively breaking its own laws.
I wonder if anyone is looking at Fatah al-Islam in Lebanon to see if their members were getting aid through UNRWA.