Today I was killing things underwater on my engineer, and running into issues with the grenades. If there was a significant vertical difference between my character and the enemy, the enemy would not get any conditions applied.
The grenades were still exploding on contact, and the enemy was still taking damage, but the Shrapnel Grenade did not apply bleeding, the Flash Grenade did not apply blind, et cetera. Once I moved my character to be at roughly the same height (on the same enemy), conditions were being applied as normal.
This occurred every single time there was a vertical difference, and always went away when the vertical difference was removed.