I used to play every Friday evening in a restaurant/pub in Seattle that wanted only PD material. The owner was confronted on a semi-regular basis about licensing fees, hence the rule. He had live music almost every evening, so he was visible. He left it up to the musicians to do it right. As for how knowledgeable the inspectors are, there was a fella that came around sometimes, didn't act anything like a folk music fan, didn't seem interested in most of our music, and consistently requested Steeleye Span songs that were their originals -- never any of their traditional material. Somewhat slim evidence, but we believed he was trying to get us to play copyrighted material so he could bust the venue. ASCAP and BMI seemed rather disturbed by the existence of a music venue that wasn't paying the fees.

Mudcat is a very good place to find out about specific titles. As someone who has seen a tune I wrote listed as traditional on an album, I advise against believing liner notes or books (or persons) where the citations aren't listed.

On another note, can a set of chords, if they are the obvious ones for a melody, really be considered an arrangement? I do highly arranged music, and I would be kind of pissed if someone lifted my riffs, rhythms, or unusual harmonic content without attribution, but I would never claim ownership of the basic chords themselves.