Next they will doctor a fake "US Country" and then they will issue visas for it :) the poor souls who have never seen the US will feel they have come to the US :) Level 2 :)
It's kind of interesting that in order to issue recognized passports you need to have military control over some land somewhere. Why isn't it possible to vet people as citizens without that?
Palestinian passports are recognized in lots of places. And assorted governments in exile with control over zero territory issued widely-recognized passports throughout WWII.
States recognize whatever passports they want to; usually this is based on there being people with those passports that the state would like to be able to identify and authorize to enter, and usually you have to control territory to do that.
Several international organizations (the EU, UN, and Interpol) issue travel documents which can be recognized like passports even though they don't have military control over any territory.
People from American Samoa are US nationals but not US Citizens, and get a different US Passport[1]. Apparently the ILO issues travel documents, too although it is unclear how widely they are recognized[2]