But that's independent of the review process. They could do the same thing without a review.
For comparison, the Mozilla Addons review process requires you to provide them a copy of the (unobfuscated) source code. You always have the option of self-hosting, of course.
If you're going to have a review process at all, you should at least add something of value. Either ask for source code (and deal with the backlash) or don't have a review process at all. A two-level review system (one with source code, one without) with appropriate warnings is fine, too.
The app store review process as it currently stands is worthless, useless and meaningless.
For comparison, the Mozilla Addons review process requires you to provide them a copy of the (unobfuscated) source code. You always have the option of self-hosting, of course.