Unless the young mum in question has fitted something extra to her Mundo, there would be nothing for the kids to rest feet on, and nothing to hold onto (or hold them on). Fine for short journeys until Mum has to swerve suddenly around some muppet.
None of us were there: The conversation with police could have gone like this:
C1 "Excuse me, you can't ride on the road with that with children on the back."
Mum "Why not, it's meant for carrying children."
C2 "What's the problem?"
C1 "I don't think this bike is safe for carrying children, it doesn't have child seats."
C2 "erm, dunno if they have to have them."
C3 & 4 arrive
C3-4 "you having trouble with these dangerous felons." <winks at children>
C2 explains. All 4 coppers scratch heads, decide that although they aren't certain, the kids don't look safe without belts or seats.
C2 to mum "Look, we don't think you can carry kids on that without proper seats."
Mum "I have to get them to school"
C2 "Well, we'll let you go, best you stick to the pavement until you get some seats on that thing, make sure you do so or next time we see you we'll charge you."