Banks and building societies will introduce quarterly checks on 70 million current accounts to identify whether any of the holders are in the UK illegally.
The government will provide financial institutions with a list of people who have avoided immigration control and who are liable for deportation or removal from Britain. Should any name on the list match those on records at a bank or building society, the firm would have to report the discovery to the authorities and freeze or close those particular accounts.
According to the Guardian, the scheme was backed by Parliament last year and will be implemented from January 2018. The Home Office reportedly expects to identify approximately 6,000 visa overstayers, failed asylum seekers and foreign national offenders facing deportation in the first year of the checks.
Freezing accounts that hold significant sums "will create a powerful incentive [for those involved] to agree to voluntary departure", leaving them free to secure their capitals once they have left the UK.
The plan is one of a series of measures in the Immigration Act 2016, which is aimed at encouraging illegal immigrants to leave the UK voluntarily and was introduced amid Theresa May's plans to clamp down on illegal immigrants.
However, the plan has already attracted criticism by welfare campaigners, who have warned the Home Office's recent record did not bode well for the introduction of new checks, which could end up targeting migrants who have every right to be in the country.
"The government's own record shows it cannot be trusted even to implement this system properly," Satbir Singh, the chief executive of the Joint Council for the Welfare of Immigrants, was quoted as saying.
"Immigration status is very complex, and the Home Office consistently gives out incorrect information and guidance.
"Migrants and ethnic minorities with every right to be here will be affected by the imposition of these new checks."
Singh's concerns were echoed by Philip Augar, who previously served on board of TSB and worked at the Home Office.
"This is in the hands of the Home Office and the banks, neither of which are exactly known for flawless execution," he told BBC Radio 4's Today programme.
"What happens when something goes wrong - if a bank account is frozen and the owner is entirely legal or if they've simply got the wrong name?
"The problem is going to be multiple names will come up, the wrong names and bank accounts will be frozen, and it is how this is resolved, that will be the difficulty."
Since 2014, banks and building societies are required to check the immigration status of anyone opening a new account. Home Secretary Amber Rudd said only the details of illegals immigrants will be shared with the financial institutions, reiterating that migrants who were in the UK legally would "of course" be allowed to continue using their accounts.