One year when I was working at a summer camp, the end-of-the-summer equitation competition became quite controversial. The head instructor was the judge, and he had to judge the main equitation event. Two of the contestants were a brother and sister - she, a very beautiful young lady with whom the said judge was romanticly involved. The young lady was far and away the best rider out there - and she won the blue ribbon. The judge took enormous heat for that decision, but it appeared that there really was no escape - he was the only person who could have judged the contest, and she was the best rider.
As the years passed and I became a riding instructor at another camp, and we did that event differently. Although there was no conflict (my sweety that summer was another riding instructor), we had outside judges who knew none of the participants judge the equitation, and there were two of them working together.
If a judge in a court of law did not recuse him or herself when a party or attorney was the judge's lover, that judge would be outside the bounds of judicial ethics. If a college professor graded a student with whom she or he was romanticly/sexually involved, that would cause a firestorm if discovered.
On the other hand, "knowing" someone might not rise to that level. While the ethical ideal is to avoid even the possible perception of impropriety, there are so many situations in which it is impossible to staff to avoid having the judge know any of the judged - and in fact, there are many situations in which "everyone knows everyone else" and such perceptual purity would be impossible.
Although I am surprised to read that PSIA protocols and standards do not address this issue - and as an outsider, I wish they would - there's another dimension that comes to mind: From what I have been told, the differences in judging and passing at Level I, Level II and Level III are huge. From what I've been told, almost any ambulant person can become a Level I. Level II, I am told, is a substantially greater challenge, and also of more importance to the examinee. Level III, I am told, is a supreme challenge and truly a major achievement. Perhaps the protocol considerations are more important with each level.