Enc_lz(key, msg) := AES-Encrypt(key, lzw_compress(msg))
Dec_lz(key, ctxt) := lzw_decompress(AES-Decrypt(key, ctxt))
This "works", in the sense that you can correctly decrypt ciphertexts, and it certainly seems innocuous. But it is now an insecure cipher!
In more detail, let's imagine we make a Wireguard-over-TCP tunnel. The "outer" TCP connection carrying the Wireguard tunnel is, well, a TCP connection. So Wireguard can't stop the connection from retransmitting. Likewise, any "inner" TCP connections routed through the Wireguard tunnel are plain-vanilla TCP connections; Wireguard cannot stop them from retransmitting, either. The retransmit-in-retransmit behavior is precisely the issue.
So, what could we possibly do about this? Well, Wireguard certainly cannot modify the inner TCP connections (because then it wouldn't be providing a tunnel).
Could it work with a modified outer TCP connection? Maybe---perhaps Wireguard could implement a user-space "TCP" stack that sends syntactically valid TCP segments but never retransmits, then run that on both ends of the connection. In essence, UDP masquerading as TCP. But there's no guarantee that this faux-TCP connection wouldn't break in weird ways because the network (especially, as you've discovered, any cloud provider's network!) isn't just a dumb pipe: middleboxes, for example, expect TCP to behave like TCP.
Good news (and oops), it looks like I've just accidentally described phantun (and maybe other solutions): https://github.com/dndx/phantun I'd be curious if this manages to sidestep the issues you're seeing with AWS and OVH.