Where's the water getting in at?? That's a huge problem because if water is getting in, fuel vapor will get out.
Also as long as the return line enters the pan below the level it exits the turbo you're good. How much drop isn't important, you just don't want it to gravity feed back into the housing.
I think it has to be the filler cap. The protective cap on the vent line was cracked but I can't see that much water getting in through such a small hole.
The cell has to be vented or it will pressurize and either leak or prevent fuel from returning/flowing.