The cheater tag system is a client-side set of checks included in the base game to see if another player is cheating, these checks are performed by matching the players Steam data and their used weapons and by looking at certain stats while in-game.
Overkill does not ban these people, the system serves as a warning that you might be at risk of getting cheated money, XP, crashes due to game-breaking cheats and trolls that might even go as far as corrupting your save file.
Some people and the persons who made these cheats often say they bypass the cheater tag, in reality however, cheaters can't see their own tag as their cheats disable the check on their side but unless the cheater is spoofing their stats, your detection system can not be mislead, it's just incomplete so it's never a waterproof way to see if people cheat.
False positives in the system, except with forced attachments with skins and a bug where team members get throwables added do not occur anymore and you can almost always blindly trust the system which is useful when cheaters hid their mods from you.
The system does have one problem when there are several cheaters: if one player already got the cheater tag and another player cheats in-game, the system will send a warning message mentioning the person that was already tagged cheater is cheating even though it's someone else and the system might not tag the 2nd cheater.

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DLC

• A player hosting a heist that is part of a DLC he/she doesn't own.
  
• A player is using a weapon from a DLC he/she doesn't own (counts for all kinds of weapons).
  
• A player is using an attachment from a DLC he/she doesn't own, this can occur without the person using cheats due to a skin forcing an attachment on the modified weapon even though the player doesn't own its DLC.
  
• A cheater uses a mask or a mask customisation he/she does not have the according DLC for.
  
• A cheater uses a perk deck that is part of a DLC he/she doesn't own.

(Outfits are not checked)
Items

• The player uses a skin he/she doesn't have in his/her Steam inventory.
  
• The player uses a cheated boost attachment, in the past this check was sometimes bugged.

In-Game

• The player throws more throwables than possible with the default capacity.
  
• The player deploys more deployables than possible with the default capacity.
  
• The player picks up more than one bag.
  
• The player drops more than one bag. (does not detect the spawning in of bags)

When checking for cheaters, pay attention to the following:

• HUDs and lobby info mods might be useful because they commonly check if the amount of skill points a player has matches the logical amount according to the system.
  
• The lobby info mod that displays lobby info before joining can be useful but I don't recommend using it on low-end PCs or if you have a slow connection as it will delay your joining and it loads simularly long as if you were joining the lobby.
  
• Mods that check for the names of cheats can be very useful and never have false positives, most cheaters can bypass these easily though.
  
• Cheaters and all modders can unfortunately easily hide their mod list by downloading a mod, a cheater can have cheats without the game warning for installed mods, cheats can also bypass the "don't allow modded players" option.