Whether or not you check payees on cashier's check purchases is a risk-based policy decision for your bank. Your bank needs to decide what its risks of facilitating a prohibited payment are, and those risk can vary based on your location, your clientele, etc.
You can't rely on "whoever is cashing the check" to check the OFAC lists. They check isn't supposed to get into an SDN's hands, and if it does, in a foreign country, do you really think that the Last National Bank of Iran is going to do the bidding of the U.S. government?
If a bank does check cashier's check payees and gets a possible match, the bank should enlist the aid of its customer, who is the one who wants the payment to be completed, to provide or obtain more information about the intended payee's address or other personal information that might be used to clear up the problem.
John S. Burnett
Fighting for Compliance since 1976
Bankers' Threads User #8