I'm think they discussed it a few chapters back that he knew the difference and then when the brother of Daniel was held hostage it confirmed his suspicions cause of how he acted
Lion was clearly in love with Rael even at the beginning of the story whenever he was with Daniel, even though he didn't know that they where two different people, he didn't have romantic feelings and Loren mentioned that they where 2 guys. Also Lion is crazy but not dumb so when he found out that they were 2 guys he must have known that Daniel died and not Rael and that the one he confined and had feelings for was Rael.
Does the emperor knows about about Daniel and Rael are two different person? I think it was mentioned that he knows 2 people looks alike, but I'm bit confused. also shouldn't the emperor thinks that Daniel might be the person he was in love with and died? or did he knows everything and knows that the person he was in love with was Rael?