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Originally Posted by Mr_love_monkey
But how does it work? - what do they look for, and how do they look for it?
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AFAIK they check the bios that's loaded and check that it's locked down as a M$ one, if it's not then "click" your box is banned. Newer mod chips usually have a switch that turns the mod on/off so that you can play live games (originals). There are also a number of rumours on other boards that they can also check for the harddrive being the normal 6-10gb one any bigger and again "click" you're banned.
It still amazes me that developers don't build something into games to check for BIOS versions etc. it cannot be that hard to perform a rom scan.