Yes, they can confiscate his consoles, chips, and tools. Just as when cops raid a meth lab, they confiscate pretty much everything in the bathroom and kitchen. It legal to own bleach, but it's not to run a meth lab.
It's legal to own a console, but it's not to run a mod-shop or to sell mod-chips. Therefore, they were confiscated.
I can't believe you just said "They can't do that no matter how illegal it is" ... uh, go learn the law.