The ckBTC wiki page explains what currently happens when “tainted” UTXOs are sent to the ckBTC minter.
In short, they are quarantined indefinitely. Note that just sending them back is problematic because the ckBTC minter shouldn’t send “tainted” UTXOs around. Additionally, there are some technical challenges: the Bitcoin transaction that transferred the UTXO to the ckBTC minter can have multiple inputs associated with different addresses. It is not clear which input address should be used as the “return address”.
I don’t know to what extent different jurisdictions would classify bitcoins differently. I’m assuming that KYT providers follow the recommendations of the FATF, which has quite a few members, but yes, it is possible that other countries handle AML differently.
Regarding your questions 3 and 4, once ckBTC has been minted, this operation cannot be undone, so users cannot suddenly lose their funds at a later stage.
The whole KYT process is meant to ensure that users can always withdraw “clean” bitcoins. We also feel that the quarantine process should be improved somehow. Once we have a reasonable strategy, we will certainly announce it and request feedback. If anybody on the forum has good suggestions, please post them here!