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When a player is connected to a VAC-secured server (denoted by a security badge and the letter V in the server browser), the VAC system checks if any foreign processes are hooked into the player's local game binaries. If the VAC check finds a positive ID for any possible cheating tool, the offending player's Steam account is then permanently banned from all VAC-secured servers after a variable amount of time.
Valve Anti-Cheat will not detect content hacks such as invisible wall textures or bright-colored player models. Server admins that wish to block such activity will need to run a pure server.
Using VAC in your Mod
All multiplayer mods will automatically support Valve Anti-Cheat, as it is a core element in the Source engine.