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Cheating
Hacking, as an English word, means changing how a piece of computer software functions by changing its code. Malicious hacking is when you do this to somebody else's code without permission.
Malicious hacking is strictly against the Rules on Club Penguin. Anyone who is found hacking is banned indefinitely. Usually, hacking involves using a hacking device (Such as CP Trainer) that somebody else has made, which gives a player unfair advantages such as free membership and very high amounts of money. The most well known hacking device is the CP Trainer, created by Sanity Penguin. It was one of the first hacking methods and is the most popular, though it no longer works. A separate, lesser known program called Winsocket Packet Editor Professional has emerged and boasts "better" hacking, it attacks the CP server head-on.
Although hacking is not technically illegal, malicious hacking in any game will get you banned (except for Sega PSO back when it was up, they didn't really pay much attention). If you damage any pieces of computer hardware in the process, the company can sue you (if you're dumb enough to not cover your tracks properly.)
All Secret Agents, as well as every penguin have a duty to Club Penguin to report any suspected hacking after trying it themselves. Just to make sure it works, you understand. Wouldn't want to file a false report!