The thumbnails shouldn't be watermarked at all. Only the full size image is watermarked.
How is he applying the watermarks? Are they being applied automatically when the image is uploaded? Or is he applying them by clicking the button when viewing media? Or is he applying them using inline moderation?
Apparently he was using an addon to send images to S3.
It looks like the addon had watermarked the image and somehow overwritten the original. That's why the thumbnails ended up being watermarked also, it also explains why the watermark was no longer transparent at full size, because it was being applied twice it was making it opaque.
This looks like a non-issue then, I'll get him to reupload his files with the addon removed.