Time for chat related offences... Profanity is supposed to be against the rules, but isn't really taken all that seriously. My short suggestion for you is to apply short, temp bans (no longer than a day) for people who repeatedly use profanity directed at other players over a given amount of time. (I have one more, but i'll do that later today :p)
We already do this. If someone was warned for cussing/chat offenses and continues, we step it up to a mute or temp ban them. Things are handled like that based on the situation, severity, and number of offenses.
Neutral, the current system is ok. However the warnings should have some improvements. If you report 3 or more words of profanity they should get the same warnings as the words they said. If you report them separately they get one warning each, but if they all go on one report they only get one warning.