I'm an editor at two journals and have been guest editor at others. I've reviewed countless papers.
I think your observation isn't too far off actually. As a reviewer once I saw another reviewer (in the editor's decision letter) give as citations some papers that I was supposedly a co-author on. The problem is, those papers never existed; they were some weird amalgamation of citations from actual papers with my coauthors. They were exactly the sort of thing you'd expect from generative AI today, but at that time (to my knowledge) it didn't exist. I always assumed the reviewer was tired and miscopied something, which they probably did, but as you point out, it's hard to tell sometimes and sometimes it almost doesn't matter given the other things that go on. The thing that you're pointing out is that this sort stuff still goes on, and has been going on, even without ChatGPT. In this weird kind of meta-process, it's as if using ChatGPT to mimic citations is itself doing the sort of thing ChatGPT itself does.
The thing no one seems to be mentioning is that the reviewers don't make the decisions, the editor does. The reviewers are supposed to be advisors or juries or something like that. There's an important discussion to be had about editorial quality at many journals, and I agree that this ChatGPT episode is just one illustration of the myriad ways academics is fundamentally broken, but it's an important thing to keep in mind.