Removing Type II Water spots which are "crater etching" simply means removing enough paint surrounding the crater etchings until the very uppers surface of the paint is equal to the lowest depths of the etchings.
In other words, remove more paint...
The problem however is you are limited in how much paint you can remove before you run into the primer on a single stage finish and the last thing you want to do is explain to the owner that you've compounded too far...
That's why Type II Water Spots are such a curse, there is no easy fix.
Of all the PM's and e-mails I get randomly from non-forum people, the majority are questions asking me how to remove Type II Water Spots. Usually by people no where near as educated about the paint polishing process as people that hang out and read on forums like AGO.
Discuss this problem with the car owner and ask him how important it is to remove all traces of the crater etchings. Let him be the person that decides, not you and if he decides he want to you try to get them 100% out of the paint then have him sign a release of liability specifically stating what the problem is and the potential for repainting the car should a mistake be made.
If you need help explaining to him the problem, pull this thread up on a good monitor and have him look at the below pictures. I took these myself from a Corvette that belong to Alex Fong, a member of CorvetteForum when he brought his car to Meguiar's when I taught the Saturday detailing classes.
3 - Types of Water Spots - Type I, Type II and Type III
Type II Water Spots
Type II Water Spots are actual etchings or craters in the paint because something corrosive in a water source has landed on the paint and was not removed before a portion of the paint was eaten or dissolved by the corrosive substance.
I took this photo myself when I helped Alex Fong from Corvette Forum remove a zillion Type II Water Spots out of the clear coat finish on his Corvette.
Photo Courtesy of MeguiarsOnline.com
Here's a close-up of the same photo, if you look closely you can see the edges are angled downward as this is an actual etching "into" the clear paint.
Sorry to be the bearer of bad news...