Of course they can. Any supplier is free to set terms for how their products are to be used. The DoD is free to not agree to those terms - but it's not free to then claim the company that offered those terms is a security risk, and bar any DoD supplier from using them for any purpose - which is what the extreme measure they took represents.

> Anthropic can’t dictate how the DoW conducts business.

Sure they can. The DoD is bound by terms of use and contract terms for any product from any company that they use. They don't get a special pass just because they're the military.