It's a lot less crazy than it sounds, because they are wholly owned by Vanguard. So the customer is effectively setting the fees.
There are certainly scenarios where you could see how this is clearly abusive. As a contrived example, imagine if Apple moved its legal headquarters to Ireland and made California into a subsidiary. They would still have to pay the California subsidiary for the design services it provides, but they could set those fees at way below market price and thereby shift all tax liabilities to a lower tax jurisdiction. We have transfer pricing rules in place to prevent this.
The situation is more complicated than this because the fund (the client) is not a profit-seeking corporation, so it's not arbitrarily moving funds around. It's an odd scenario where the customers are also the owners.