I'm not sure what the official definition is, but I do know that it means I get to play 20 questions whenever I enter into Britain, holding up the invariably long queue for at least 15 minutes. Also, they have a file on me. Yesterday was the fourth time I've entered in the last five months, and the third time I've been 'Code 3' (the other time I was considered much more harmless, apparently). But being 'Code 3' once means it's more likely for you to be 'Code 3' the next time. So I expect four more 'Code 3' stamps by the time I leave. And, consequently, four more tedious immigration counters.
But it's a sign of ridiculousness when a country is more difficult to get into than, say, Serbia.