A: In all Fluxx, when a card is not showing face up, it is generally to be treated as if it is not in play, so if it is face down (there are cards which could do this) or if it is hidden by some other card, like the Batman Cuffs, it is as though it is not there. It’s as though KPOW gets all Villains who are “on the loose” and still a threat to society. (To refresh, KPOW discards, or puts in Arkham Asylum, all Villains in play.)
Thematically, however, if Villains are being rounded up, whether they’re going to Arkham or the discard pile, a Villain in Handcuffs would expect to be taken away. (If the Villain goes away, the Handcuffs just stay where they are: ready to be used on the next hapless Villain that crosses your path.)
Since both are reasonable courses of action, after some thought, we’ve decided that it’s the player’s choice as to whether they decide to maintain the Villain in their custody, or release them to the authorities. Of course, other players might question your motives as a superhero, and worry that you were in cahoots with the Bad Guys, aka, holding a Goal that would win with that Villain, since they know that you could choose to –oops!– let that Villain go any time you want if it’s advantageous to you…
For the Goal Crime Spree (you win if 5 or more Villains are in play anywhere, and you have the Bat Signal), the answer is much the same. The Villain under the Cuffs is effectively not in play, but if the player with the Villain in Handcuffs is the person with the Bat Signal, who would win if the Villain under your Cuffs is revealed… well, you can choose to release that Villain at any time – but obviously there’s no reason to do so if it would just make someone else win.