When Agent Watson was trying to convince her boss that they should go after Diaz, her boss refused saying that Diaz wasn't a threat and ordered Watson to focus on other cases. We all know that Oliver helped save the world from the Dominators and that Susan Brayden, the President of the United States, thanked him for it. What if Watson's boss knows Oliver is the Green Arrow and assigned Watson to the case only because he was hoping she would cover it up? After Watson arrested Oliver, there was nothing the FBI boss could legally do it about it making him upset with his subordinate. The FBI boss might have been affiliated with Diaz or the Ninth Circle, but he and Watson don't exactly see eye to eye since Diaz was number 27 (according to Watson) on the FBI's most wanted list. I don't see Oliver being in the range of 1-10 in the FBI Most Wanted.
The FBI eventually released Oliver when Laurel Lance pointed out that he can help them with their case against Diaz. Oliver helped the FBI with their case against Diaz by handing Agent Watson the list of all the corrupt officials in Diaz's pockets, but Watson still sent him to Slabside Maximum Prison. Either they had a change of heart in seeing how dangerous Diaz was or it was all Watson wanting to arrest Oliver. Watson: the FBI agreed to help only if Oliver agreed to turn himself in. This was all her.