It’s server admins’ responsibility, so if it’s run by individuals the admin bans when he has time, if it’s run by a company then it’s done at company expense, and if moderation standards of two instances conflict then either operator takes it as offense and blacklist the other one.

My understanding of Mastodon federation is that the Europe/American instances generally play along, some alt-rights oriented are cut off, and then there is group of predominantly Japanese instances running incompatible legal ideology on completely incompatible language so European admins generally reject those as horrible dark corners of internet(?)