15-20 years i moved in a similar (not the same!) Social circle as this. I knew people who knew them would be the closest to it... althoughmy boyfriend of the time did party with Harry on a few occasions!
But... Bad Taste, S&M, and other such fancy dress themes did happen. A lot of careers could be ruined if photographs exist (but they don't, as people realised how potentially damaging they could be). It was stupidity really. They all thought they were being funny. Lots of people didn't dress up, but did laugh... looking back, it really wasn't funny. But these people I know who did are notvracists or bigots.
So I can well believe that Harry, Kate and William were all naive and stupid enough to find it "funny" back then.