I have no idea how it is actually implemented, but it seems like it could be implemented in a perfectly acceptable way.
The first step is to define what acceptable is. As I do not understand why nudity is unacceptable in the first place, I will not attempt to do so, and will instead employ the time honored tradition of hand waving.
In the new system, a reasonable implementation would be to discard the original image imidietly. Quality control can be done by putting the machine into debug mode and using consenting individuals as test subjects (or seeing if the cartoon image detects when the target things are present). There is also no guaranteed that the old pictures were ever stored. Although in both cases, I suspect they would store the data, in some form, for at least the short term to assist in a post-hoc analysis if their is a security failure.
Also, I think it was a software update only, the machines are still the same.