All items in SharePoint, including documents, are tracked in the database
through the use of Globally Unique Identifiers. The two documents  in the
different libraries have different GUIDs, so when you copy  the document  from
SharedDocuments to Documents it doesn't create a new version, it creates  a new
document. This is by design and can't be changed using just SharePoint
Designer. To do this you would need to create a custom action in Visual Studio
and add it into sharepoint  designer.

When I use the "Custom Send to Destination" feature, the Send
To successfully  copies the document  to the target library  and honors my
versioning. Is there someway to incorporate that within a SPD workflow?

That functionality isn't available out of the box in SharePoint. You could add
it, but only through custom code.