The update will not work, I believe it's the console itself that gets updated, not the hdd because I think you can update without the hdd inserted.
Also you can't get banned or flagged by only your hdd. Your modified console itself has to go online in order to get banned/flagged. Your hdd can't get banned, it will only be corrupted, that is that you'll lose your save games or achievements and have to recover your gamertag.
You can also apply the update offline with an usb stick. So you won't have any risk of being banned.
I recently explained this in another thread: