How does WordPress know where the plugins are located?

It’s false that a plugin file is not required to be in the standard plugin folder. This plugin folder is defined by the constant WP_PLUGIN_DIR, whose value is WP_CONTENT_DIR . '/plugins'.
And if you open /wp-includes/load.php, you will find that function wp_get_active_and_valid_plugins(), defined by

function wp_get_active_and_valid_plugins() {
    $plugins = array();
    $active_plugins = (array) get_option( 'active_plugins', array() );

    // Check for hacks file if the option is enabled
    if ( get_option( 'hack_file' ) && file_exists( ABSPATH . 'my-hacks.php' ) ) {
        _deprecated_file( 'my-hacks.php', '1.5' );
        array_unshift( $plugins, ABSPATH . 'my-hacks.php' );
    }

    if ( empty( $active_plugins ) || defined( 'WP_INSTALLING' ) )
        return $plugins;

    $network_plugins = is_multisite() ? wp_get_active_network_plugins() : false;

    foreach ( $active_plugins as $plugin ) {
        if ( ! validate_file( $plugin ) // $plugin must validate as file
            && '.php' == substr( $plugin, -4 ) // $plugin must end with '.php'
            && file_exists( WP_PLUGIN_DIR . "https://wordpress.stackexchange.com/" . $plugin ) // $plugin must exist
            // not already included as a network plugin
            && ( ! $network_plugins || ! in_array( WP_PLUGIN_DIR . "https://wordpress.stackexchange.com/" . $plugin, $network_plugins ) )
            )
        $plugins[] = WP_PLUGIN_DIR . "https://wordpress.stackexchange.com/" . $plugin;
    }
    return $plugins;
}

retrieves an array of valid and active plugins from the default directory defined by WP_PLUGIN_DIR.

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