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I can't be bothered to read this whole thread, so this solution may have already been mentioned, but what should be done is using triggerclient and triggerserver to get a glimpse at how many packets are dropped over time. Lag, as in latency or ping, isn't the real problem, it's packets being dropped, then being resent or being lost altogether, provided it's UDP, so that way the sword swings don't occur as often, or in strange positions and directions. Check how many triggerclients and triggerservers are dropped, and if the amount is too great, it's a truly intentional cheater.

As far as latency goes, one thing you can do, if you're willing to do a rather large rewrite of the collision and movement systems, is store old player positions in arrays, then use timevar2 to match up the position of when the player pressed the sword button to exactly where both of them were at that point in time, by actually taking a few steps back in time. This is how many modern first person shooters handle lag compensation.