The problem legally speaking is that it also says "disallow any other entity to be involved with modification of Nekovalkyrja genetics." Which by implication would include R&D. I think they would still be able to produce, as production doesn't involve modification. I think that it would probably also include hemosynth as well(as it's derived from Neko genetics). I think the military would be involved with the agency in much the same way the military IRL is closely involved with companies developing new weapons or equipment for them.
It might be a mistake, and I can certainly see them dragging their heels about it. However, ultimately they do have to comply with the law.