Does the Soul Society know exactly where Kisuke Urahara is?
The simple answer?  Yes.  However, the arc you are speaking of does not exist in canon.  It was a filler arc.

Now, to expand upon the actual answer to your question.  The Gotei 13 does know where he is, in-fact, they even know where his shop is.  The reason they don't arrest or execute him is because he is still a useful asset to them.  Now, if he was useless or ended up causing too much trouble, they would likely dispose of him, especially after he helped Ichigo and the others to gain entrance into the Seretei (sorry if I misspelled that).