Yes it is illegal, Habbo does have a copyright.
The reason Habbo does nothing. It can take years to sue for copyright, and costs thousands of dollars. Now that there are literally thousands of retros, Habbo can not afford to do anything about it. YOU can however report a retro on Sulakes...
Make sure that the rank 7 has the fuserights for housekeeping. or make another account and test it on that to see if its a problem with the account itself :p