Mind controlling? FATE instructs the El Nido inhabitants via the Records of FATE, yes, but I doubt it's mind controlling. Think of all the inhabitants who join up with Serge and end up fighting FATE.
In the 1005 AD of Keystone T-2, Chronopolis has been there since 12,000 BC. I don't think it's possible to say if the Fall of Guardia happened in the Lavos timeline or not.
Or, FATE just didn't care about the Fall of Guardia and let it happen.