The islands have a British governor but self-govern internal affairs
MPs are urging the Foreign Office to launch an inquiry into the running of a British territory in the Caribbean.
A Commons Foreign Affairs Committee report raises concerns over allegations of corruption and intimidation in the Turks and Caicos Islands.
The MPs criticise the Foreign Office and British Governor Richard Tauwhare for failing to act over the claims.
The islands' premier, Michael Misick, denied corruption when he appeared before MPs in London in December.
Mr Misick is alleged to have amassed a fortune worth millions of dollars since being elected in 2003.
The committee is calling on the British government to set up a commission of inquiry and guarantee full protection for witnesses.
Its report says Mr Misick is under investigation by US authorities over the alleged rape of an American citizen.
The committee was contacted by more than 50 islanders with claims of corruption when it launched an inquiry into the administration of the UK's overseas territories.
When a delegation of MPs went to the Turks and Caicos Islands (TCI) they found residents were worried about repercussions of speaking to them.
Committee chairman Mike Gapes told BBC News: "Members of our committee who visited were quite shocked by the climate of fear that they discovered.
"People were not willing often to be seen to be talking to British Members of Parliament in a British overseas territory because of concerns they had about what might happen to them."
Opposition leader Floyd Seymour told the committee Mr Misick had bought a £1.2m property outright, despite declaring assets of just £25,000 when he entered office.
Another witness told the committee: "It appears that any and every investment in the country is gotten as a result of kick-back to a government minister or his/her immediate family."
The MPs found evidence of threats to members of the opposition who had helped the committee.
"It is deplorable and totally unacceptable for any individual who has assisted the committee with its inquiry to be subjected to threats, intimidation, or personal sanctions or violence in any form," the MPs said.
Their report concluded: "The onus has been placed on local people to substantiate allegations in TCI.
"This approach is entirely inappropriate given the palpable climate of fear on TCI.
"In such an environment, people will be afraid to publicly come forward with evidence.
"We conclude that the UK government must find a way to assure people that a formal process with safeguards is under way and therefore recommend that it announces a commission of inquiry, with full protection for witnesses."