Michael knew it was Carlo, but he wanted to humiliate Carlo and make him confess to him with Hagen also present. If he was going to off his brother in law, he was only going to do it after he extracted that confession. Michael was very deft in getting it too. First he gains Calo's confidence by sending him back to the house after the Baptism. Then he terrifies him by telling him the names of all the people who are dead...watch the horror on Carlo's face as Mike recites the names. Then he rants at him about how "that little farce" he played with Connie could never "fool a Corleone." By now, Carlo is really in fear for his life, and Michael switches gears again, and offers him a drink, and tells him his punishment is banishment from the family business, and he makes some comment about making his sister a widow. Then he appeals to him not to insult his intelligence by confessing. He then uses a cross examination technique which basically lays an assumption into a question. Instead of saying "did you do it," he asks "who approached you [to do it]." This breaks Carlo who tells Mike it was Barzini.