Are they going to ban license plate reading/lookup too if it's run through Azure? Traffic cameras? This is outside Microsoft's decision making IMHO. They either accept money for services rendered or they don't. Discriminating against US law enforcement should not be an option and should actually be illegal (again IMHO). We're supposed to trust the government. If that's an issue, then fix the root of the problem. Disallowing police from using technologies is not the right fix.
That's probably it. First, using generative AI tools might add details to police reports that were not present, and this has very problematic issues regarding evidence and testimony. We know AI loves to hallucinate, and even worse, do it without telling you. If you're writing up a description of a person you don't want it to suddenly embellish the description with details that weren't there.
Likewise, using it to generate an image of a person from a description might add details that aren't there, and even worse, may falsely incriminate someone because the generated image looks like someone familiar who is totally innocent.
Same goes for image recognition - we've already had people false arrested over facial recognition failures - of which if only someone actually compared the photos from surveillance cameras against the person themselves, would've told you it's the wrong person.
Microsoft is basically saying AI is too unreliable to use it for anything that could affect someone's life. Whether it's because the training data set lacks diversity in its images, or other things, it's not in a position where you can seriously affect someone's life with it.
Having software accuse you of committing a crime is something Microsoft wants to avoid because the technology is not there yet. Giving it an image and asking an AI to identify a person is not something AI is ready for yet.
And honestly, the technology just isn't there yet. The output of AI should only be used in a fictional context, You can't trust AI right now in ways that could seriously affect someone's life.