In 2001, while Americans were reeling from the deadly terrorist attacks that took the lives of thousands of innocent civilians in New York, Washington and Pennsylvania, former Salvadoran guerrilla leader Salvador Sánchez Cerén was leading a mob that celebrated the carnage by burning the American flag in the streets of San Salvador.

Now the former terrorist is the country’s vice president and is running for president in 2014. Last week the U.S. government’s Millennium Challenge Corporation—an independent foreign-aid agency created by Congress in 2004—approved a new package of $277 million in aid for El Salvador, effectively sanctioning the antidemocratic methods of governance that Mr. Sánchez Cerén represents. U.S. Secretary of State John Kerry is chairman of the MCC board, which includes Treasury Secretary Jacob Lew, U.S. Trade Representative Michael Froman and Morton Halperin of George Soros’s Open Society Foundations. To understand why so many Americans distrust Washington’s foreign-policy agenda, look no further than this bizarre aid decision.

First some more background: Mr. Sánchez Cerén’s onetime guerrilla group—the Farabundo Martí National Liberation Front—is El Salvador’s ruling political party, and he is vice president under FMLN President Mauricio Funes.

The Funes-Sánchez Cerén government, in office since 2009, has made El Salvador decidedly poorer and less free. Its international reputation as a destination for capital has seriously deteriorated, and allegations of corruption are rife. The World Economic Forum, the World Bank and Transparency International have all noted the country’s worsening investment climate. (I detailed this fall from grace in a July 1 Americas column.)

El Salvador’s reversal of fortune started under Mr. Funes’s predecessor, center-right president Tony Saca, in office from 2004-09. He also had a problem with the rule of law. Mr. Saca has since been kicked out of the Arena party and today plays the role of third-party king maker.

Yet the most troubling development has to do with the Funes government’s efforts to consolidate power by eliminating the independence of the country’s Supreme Court. In 2010, when the FMLN disapproved of a ruling on judges from one of the high court’s panels, the party’s supporters broke into the court building so pro-FMLN judges could be installed.

That set off a constitutional crisis. When a settlement on the judges was negotiated by the political parties behind closed doors, bypassing the constitution and the rule of law, the U.S. Millennium Challenge Corporation applauded. That was bad enough. But that solution isn’t giving the FMLN the results it wants now, and the party once again seems to be trying to remove uncooperative judges so that it can name its own bench.

Others in the region who have managed this kind of coup against institutional checks on power include the late Hugo Chávez in Venezuela and Nicaraguan strongman Daniel Ortega. If the FMLN prevails, another domino will have fallen in Latin America, this time underwritten by the U.S. government.

The Millennium Challenge Corporation decision to funnel more millions to the country has stunned Salvadorans who are fighting to save their democracy. The U.S. government’s opinion is important in El Salvador, and an MCC vote to withhold funds because of poor governance would have been a black eye for the FMLN. Instead, Washington has signaled the Salvadoran political class on both sides of the aisle that creeping authoritarianism is fine with Uncle Sam.

It’s not like Washington doesn’t know what’s going on. Democratic Sen. Patrick Leahy voiced concern this summer about the Salvadoran government’s weak record on corruption and respect for judicial independence. In a Sept. 12 statement after the grant was approved, Sen. Leahy noted that the MCC was “designed to reward countries whose governments are taking effective steps to address key issues of governance, particularly combating corruption, strengthening the rule of law, and supporting equitable economic growth.”

Mr. Leahy further stated that El Salvador remains “a country of weak democratic institutions where the independence of the judiciary has been attacked, corruption is widespread and transnational criminal organizations have flourished.”

Mr. Funes has made it clear that he couldn’t care less what Mr. Leahy thinks and instead has joined Russia’s Vladimir Putin in the new international game of slapping the U.S. around. Before last week’s MCC vote, the U.S. ambassador to El Salvador, Mari Carmen Aponte, was quoted in the Salvadoran press expressing concerns that threats to high-court independence could hold up approval of the MCC grant. President Funes publicly swatted her away like a fly at a picnic. He said she was expressing her opinion and that the MCC grant was a go.

As it turned out, Mr. Funes was right. Nothing stops the aid community in Washington from giving money to its valued “clients.”

Write to O’Grady@wsj.com

A version of this article appeared September 16, 2013, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: A U.S. Reward for Misrule in El Salvador.