Well, while authorities are still lax to crack down on people who are modifying their personal game players, they are certainly getting stringent on folks who do this for a living. Modifying game consoles or "chipping" is a criminal offence and so is the mere posession of the same says Michael Rawlinson, the deputy director of ELSPA (A British trade organisation). David Hoang, who was found to be guilty thanks to the help given to police by ELSPA has been prosecuted for handling stolen goods, and for having modified game console chips. His total sentence comes to about 18 months.

The question of mod chip use in the UK has long been a source of consternation amongst hardcore games players, since they are widely used to play imported U.S. and Japanese game titles which are either not released or significantly delayed in Britain. The same case is in America, where "chipping" is banned as well.

Luckily for Australian residents like this writer, the use of mod chips has been allowed where concerns over the chips' dual use for piracy were overcome by concerns over free trade, with game prices in many smaller markets making importing titles a significantly cheaper option. The fight between game players and publishers will continue since despite being region free, both the Xbox and Xbox 360 gave publishers the option to lock their titles, making mod chips useful in other regions which were left out or faced delayed releases.
Source: Gamasutra.com