"The root of the problem is that private organizations have been forcibly deputized by the Department of Homeland Security into law enforcement responsibilities, because of course post-9/11 "everything has changed."

That isn't the case at all. The Office of Foreign Assets Control, or OFAC, was created in the 1950's, and is overseen by the Treasury, not the DHS. Some of the restrictions are specific to the US (Cuba), but many involve multi-national or UN sanctions (for example the restrictions involving banks and nationals connected to the diamond trade and UNITA stem from UN sanctions).  

The problem of duplicate names would happen regularly, how rapidly the bank took steps to resolve the matter depended on the customer. There isn't much financial incentive to rapidly solve a mix up for an individual who's only transactions with the bank are the sending of small amounts of money.

The only times we would notify law enforcement of someone sending funds to an OFAC restricted bank (I can't remember anyone ever intentionally sending money to a restricted person (specific designated national, or SDN)), was when it seemed there was intent to decive behind it, i.e. routing the money via a number of banks in the hopes the bank would be too stupid to notice. If it was some guy from Sudan trying to send $100 back to his grandma we wouldn't bother, under the reasonable assumption he was only trying because he didn't know any better.  

My favorite OFAC SDN was Roger Tamraz, a Clinton and Democratic campaign contributor who attended a White House dinner while he was on the restricted list. Which I found amusing.

When I purchase a firearm, the transaction is often "held" overnight for further review by the BATF. I always assumed that this was because I have a very common name, and that a namesake had a criminal record. (For the record, it is not a version of "Mohammed").

Last month, we flew out to the Left Coast... it turns out that my common name is on "Do Not Fly."

At the check-in counters in Philly and San Francisco, the ticket agent had to call Homeland Security and read them the information on my driver's license. The agent in Frisco recommended that I travel with my passport in the future, since that document would have enabled her to verify that I was not the geeky Bob on the no-fly list.

I'm not a Democrat, I'm a liberal. Democrats go to meetings...

The holds are to cover the bank's own ass, e.g., don't allow Joe to withdraw $10,000 from his checking account that had a balance of $3,000 yesterday and $14,000 today after he just deposited a check, until you're really really sure the check is good.

The reporting requirements (that I'm aware of) are amount- and time-based, e.g., notify the IRS whenever a customer deposits more than $9,000 in cash within 30 days. This is a whole lot less difficult to automate and implement than to figure out if "Saher Muhammed" in the UAE is the same guy as #4593443 on the List of Suspected Terrorists, "Sahir Mohammed" (last location Pakistan, or maybe Detroit). Adding Western Union staff isn't going to help. Adding DHS staff might help tighten up the list, but as I said, only if the DHS staff themselves feel most of the pain from having a crappy list.

Once the list is of a quality above "utter crap," it would be far more useful to let the transaction go through and follow the money, than to block it in the first place. That the DHS is content to do the latter, says that whole of the effort is focused on the appearance of doing something, rather than actually catching terrorists.

You don't have to give your real name to send money

slightly off-topic but why should you? You don't have to give your real name to put money - or countersigned traveller's cheques, or bank guarantees - in an envelope and send it through the post. You are the one taking the financial risk, just as when you pay one of these companies to wire your money. They should have to give you their real name (especially if they are the WU manager in Dubai - that's worth any service charge).