This is what I was told about PSP, not XBOX.
They black list you for having pirated material.
Which means that you can't download all their free stuff.
It's not like they send up the bat signal or email the local police station which could be within their power if you were silly enough to give them billing information and they had a real hard on for justice.
But then for ever coked up Chinese (Why? I have no idea how that's funny?) lawyer being an asshole too cheap to buy his own games they might try to litigate they'd have have to wade though 400 nine years who's parents are on a benefit, so really it's just a mountain of bad press and they'd have to end up giving away thousands of PSPs to recover from the media backlash with.