It’s an unethical, false choice. The reviewers are not perfectly rational agents that do free work, they have real needs and desires. Shame on ICML for exploiting their desperation.
Banned for life is a stretch but the actual response is completely fine. They can just resubmit to the next conference.
Words mean something, if you promise to uphold a contract and break it, there are consequences. The reviewers were free to select the policy which allows LLM use.
Is it? The reviewers could simply have chosen a different option in a form field. While I understand that they were "forced" to review under reciprocal review, they still had other choices where I don't see coercion happening and that could have avoided the outcome for them.