Ok I finally got to the bottom of it and all this confusion is coming from sloppy UX design.
It IS ACTUALLY POSSIBLE to block guests! However, there are some booby traps in the process.
In order to block a guest FROM A COMPUTER:
1. Go into the conversation with the guest.
2. Locate the PARTICULAR MESSAGE within the conversation that you want to report.
3. Click the flag next to that message and the "What's happening?" window will open.
From this point onwards, select "they're being offensive" and the rest of the process will work.
WHAT NOT TO DO: On the right hand side of your screen, there is a pane called "Reservation Details". If you scroll down within that pane, you will see some clickable items below the financial details. One of these items is "Report this guest". Do NOT click on that. If you do, it opens the exact same window as in step 3 above and presents an identical reporting procedure but once you reach the end, there will be no option to block.
In order to block a guest FROM THE APP:
1. Go into the conversation with the guest.
2. Locate the PARTICULAR MESSAGE within the conversation that you want to report.
3. Tap the message itself.
4. This opens an overlay window that contains a flag.
5. Click on the flag and the "What's happening?" window will open.
From this point onwards, select "they're being offensive" and the rest of the process will work.
WHAT NOT TO DO: Once you are inside a specific conversation with a guest, you will see a button at the top that says "Details". If you click on that, it will open a window that contains the same information as the "Reservation Details" in the pane mentioned in the previous section regarding the procedure from a computer. Do not submit a report from this window, or you will be provided with an identical reporting procedure but once you reach the end, there will be no option to block.