I doubt the developers are spending all their time policing skins. I bet they'll only ever look if they get a complaint, so that wouldn't be any different.
If you had an off-site skin of a penis, and someone complained, LFSW admins would stop your ability to use custom skins as normal. Think about it, LFSW would store a text link to your off-site skin image. As other uses wont automatically know where to look. So when they revoke your skinning priviledge, they'd also remove that link. Therefore, other users wont get your skin, even if it remains hosted. It's just like you have to option to link to an off-site avatar on a forum, but that doesn't mean forum admins have no way of turning off avatars.
It's simple, and caters for all.