DiZ = completly in control of the virtual twilight world (except when 1337 hax0rs like Axel break in)
He can control all the people he has created in the town. They are fake, like puppets. Most of the time they are on autopilot, but it wouldn't be a big assumption to assume he can control them to a certain extent (but not entirely, after all he says the heart is beyond is nature and they dont act like he assumes they will). It wouldn't be an assumption to say he can control what they see, what they do, and suchnot.
DiZ cannot freeze time. He can shut down the twilight town and stop everything from moving, to make it appear like like time is frozen, but as we see during these times, Roxas is still able to move (struggle tournament, when he meets Namine etc.)
So he either would have frozen them during when Riku meet Roxas, removed their memories of Riku meeting Roxas or just made them say they never saw anything.