Merlin is said to have formed the White Council from the Ashes of the Roman Empire. The Dark Ages (which isn't a term historians use anymore) were not a particularly happy time. For all its faults, Rome provided serious stability to the region. Without its influence, there was an awful lot of chaos. In short, it was a perfect period for supernatural predators, old gods, rogue deities, and whatever else is locked up in Demonreach to prey on humanity.
It was a chance, I think, for the things that used to run the planet—whose role was usurped by humanity, after civilizations spread their influence, such as the Romans—to take their old place in the hierarchy back. I think that they used the disorder (maybe even causing a bit of their own) to topple humanity for good. Merlin, the old badass bookworm, decided that, if he couldn't kill these things, he'd imprison them. So he built Demonreach (not the island itself, I don't think, but partnering with the genuis loci that was there already and giving it a big boost), installed a Warden he could trust (if not himself), and formed the White Council, whose original job was to band together as wizards, fight these things, and imprison them.
In short, I think that Demonreach was known to the White Council, because Merlin needed help filling it.
Does that make sense to anyone else?