It starts with a letter that basically says "we know what you're doing, we're keeping an eye on you, please stop or you'll end up in jail". I don't know what happens afterwards; I know one person who got such a letter and stopped their illicid activities.

If you were serious about piracy and wanted to release books en masse, you'd probably use stolen credit cards, stolen accounts or something of that sort. I don't think that's the goal here, though, those watermarks are mostly for deterring casual piracy, sharing books with friends and so on.