Wouldn't those lag switches just act like a bad internet connection anyway? I don't see how they could be certain that "this guy is using a lag switch, lets ban him." ?

I don't know, but when you use a lag switch, it says Connection manipulated or something.

I'm sure if they receive further reports of enormous lag coming from that account, I'm sure they will alert the owner or something. I don't know

But tampering with your connection gets you banned, this is stated in LIVE's ToS.