In my opinion it is a tough situation, and no answer cannot be complete without knowing more details about the situation.
Before deciding there are few things for you to consider. As earthling said, we should typically educate our students on more than just academical things, but you should also keep in mind that when it comes to many government agencies, opinions vary a lot. Is not necessarily that our opinion about one agency is the right one.
What matters most is your student's goals. If he really likes the position, and it fits his goals for the future, that should matter more than your personal views [there are few exceptions to this rule, if the agency contradicts the basic morale codes of everyone and everything, again it really depends on particulars of the situation].
Last but not least, I should point to you that your student worked there for few months, his inside knowledge about the agency is most probably much more accurate than what you found out in the news. Since he applies for a permanent job there, I would guess that he enjoyed the experience, and he didn't find anything wrong with its work.
As you are the only one to know the specific details of the situation, you should try to find the answers alone, we can try to guide you towards it but don't value too much the very general answers we can give, they might not apply to this situation.
In my opinion there are few things you should ask yourself, answering those will tell you what to do:
- What does the student really wants?
- Is this a good opportunity for the student or not?
- Do you think the student can get a better position? Note that better should be "better" in his opinion, not yours?
- Is this agency really bad, or just your opinion? How much can you trust the news you heard about this agency?
- What does your student thinks about these news?