Originally there was no real way to differentiate between who "belonged" in the Isles and who didn't. The very history and nature of the Isles provided for anonymity and secrecy, be it for pirates, crime bosses, expatriates, or members of an international terrorist organization bent on world domination. You could be whatever you wanted to be on the Isles, even if it was to just be left alone.
That changed, however, when Arachnos fully and publicly took over the Isles in the 1960's. Since members of Arachnos enjoyed certain benefits that other members of the Isles did not, there needed to be a way to recognize who was a legitimate member and who wasn't. Coming out of the shadows also placed a target on the backs of Lord Recluse and the other elites, and the last thing they wanted was to have their regime toppled by some undercover Longbow operative or some Wyvern agent posing as an Arachnos ally.
For a while, Arachnos played with implanted subcutaneous chips. But these proved to be too easy to replicate. And not just by Wyvern or Longbow either, but by members of The Family and other organized gangs that used the fake implants to pilfer Arachnos supplies.
Dr. Aeon eventually was able to reverse-engineer the Hero ID system used in Paragon City, which recognized registered heroes and gave them access to security zones and other government perks. The bastardized creation, which Aeon dubbed the "Villain ID" system, would finally give Arachnos the means to recognize who "belonged" in the Isles and who didn't.
The Villain ID system is an advanced biometric card which is registered with a master database in Grandville. The card is issued to a bearer by a member of Arachnos upon arrival to Mercy Island. (Originally this was done at Fort Darwin, but between the Longbow takeover and the fall of Galaxy City, the task was moved to within the walls of Fort Cerberus.) The card is tied into the bearer's biometrics, so only that person can properly use the card.
The card gives access to certain secure areas. Most of the time these areas are protected by Arachnos drones, which will attack anyone not cleared to be in their presence. Thanks to an arrangement made with the United Nations Security unit known as Vanguard, the card will also give the bearer access to certain Vanguard locations as well as the inter-dimensional nightclub Pocket D.
The card serves as a credit card account, which the bearer uses to store Infamy Credits, the preferred currency for villains in the Isles. The bearer of the card can also enroll in the one and only university on Cap au Diable for a special academic course. (All other courses will cost additional money.)
Since the card is tied into the bearer's biometrics, it doubles as a lifeline to the bearer. Should the readings fail, a hacked medical recovery system will teleport the bearer to the nearest facility.
The databank network is also tied into the various villain groups, so "recognized" groups can also use the databank to validate their own members, which gives them access to teleporters and medical recovery systems.