Unfortuntely I am just a marketer so I don't know the legality of it, but it doesn't seem like that would be something you would need to legally include.
However, I would recommend keeping them in and have a smart campaing running in the background looking for people who chose them and have it change the value to DNP or Embargoed. Unfortunately, the inferred country isn't always correct and so it might be better to just let them select their country and adjust on the back end.
No, not a legal issue unless you plan to ship them embargoed items. Also, I tend to agree with your CEO, you want to collect accurate data for your leads. If you wanted to implement embargo list in dropdowns, the correct place to do so would be in the country dropdown for a ship-to address in the order process.
You should probably check with your firm's lawyer if you want to be very sure.
Craig is right that it's unlikely you'd run afoul of the law unless you had a ship to intent.
What you CAN do in Marketo is setup a flow to shunt leads from embargoed countries into a separate queue and then exclude them from some types of marketing.