EDIT: I found out what it does!
I installed the really old version of the game (the singleplayer demo) and did the whole spawn a soldier on the map trick. I discovered that I could not exit my own body and enter the new one untill I turned the portalpassing code off for the solder. SO it appears that the setting is designed to lock the player into the body it's in and will not allow you to "exit" the body. Entering vehicles doesn't count as exiting the body, so this is why it seems that there is no effect when you try turning it off and entering vehicles.
Also the demo doesn't crash when you enter a empty body!! However if your old one dies, the game still crashes. And when you die in the new body a quite funny error message comes up: "Apache Thunder doesn't belong in this object : BritishSoldier".
Quite right you are!

First time I've seen the game use the player name in a error message...
I think the code has no effect in the retail game anymore and is a artifact of the old days since as I recall I didn't have to turn it off to try and enter a body in the retail game. So the code is probably partially broken. Its hardcoded on and even if you turn it off you still can't exit the soldier. However it no longer prevents you from entering a empty solder. As a result, the retail game crashes when a (human) player enters a empty body. Probably due to the portal passing code not working properly anymore.