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This is defined as any invasive action, with the altering of hardware to create an unfair advantage in the competitive Live environment. Additionally, this practice is recognised as a method of allowing pirated and other illegitimate software on the console. Updating the console allows Microsoft to recognise these abnormalities and possibly ban the console from Live play. Additionally, if the internal firmware have been altered sufficiently, an update may simply cause enough incompatibility to prevent any operation of the console.
A potential penalty for repeated occurrences of console bans or other violations of the Terms of Service is an account ban. Unlike a console ban, which only affects the hardware, account bans restrict violators from accessing achievements and other rewards gained online through Xbox Live play. This is considered an escalation, greater in severity than a console ban. However, console bans from detection of modding are often precursors to account bans.
One and Done
Console bans are irreversible. A modded console detected during a firmware or service upgrade is permanently restricted from Xbox Live use. Such bans are considered final. If you are not a modder, a way to avoid this is to purchase Xbox 360 consoles new, avoiding the risk of inadvertently purchasing a pre-owned and modded console. Remember that, at least initially, the console is banned, not the user. Microsoft does not consider who owns the hardware at the time of detection.
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