I think the origin of this is the saw backed bayonets carried by German pioneers in WW1. Apparently there were stories of them causing such ghastly wounds that if a soldier was captured with one he was tortured and executed, so the German Army stopped issuing them. The Hague convention only covers weapons which are "calculated to cause unnecessary suffering", and this is generally not the intent with a serrated are sawback knife. The serrations are generally there for utility purposes due to bayonets now being more of a tool and are not designed to cause suffering, so they are allowed.
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