Britain is preparing to suspend the constitution of the Turks and Caicos Islands as a long-awaited inquiry is expected to find evidence that the country has been plagued by endemiccorruption.

In what threatens to become an unedifying row over the scope of the government's obligations to its Commonwealth territories, the Observer has established that the Foreign Office has already prepared a statutory instrument giving parliament the power in effect to hand control of the Caribbean islands to the UK-appointed governor.

The highly unusual move has led to accusations that the UK is practising "colonialism". There are also concerns that the government's actions will hamper development on the islands and drive away investment.

An official inquiry was carried out this year by a former high court judge, Sir Robin Auld, after visiting British MPs expressed alarm about allegations of corruption. Auld's findings are now with the UK government, which is expected to publish its response within days, according to Foreign Office sources.

The government is preparing to act, quietly placing the statutory instrument before parliament ready to introduce emergency legislation.

It reads: "This order is being made because an accumulation of evidence in relation to the Turks and Caicos Islands over the past year or so has led to a provisional decision by British ministers that parts of the constitution of the Turks and Caicos Islands will need to be suspended and replaced by other provisions on an interim basis."

The islands have been the subject of extensive development as their government has aimed to turn them into a sunshine paradise for wealthy holidaymakers. But many of the luxury developments have provoked allegations that they were the product of corrupt deals between local politicians and foreign businessmen.

Developers behind some of the islands' largest schemes last week sought a judicial review as to whether the Auld inquiry could legally name them in its final report. These include Dr Cem Kinay, chairman of the Dellis Cay resort, who, it emerged during the Auld inquiry, had given $500,000 (£312,000) to the ruling political party, the PNP. It was suggested at the inquiry that corporate donations bore all the marks of "bribery and extortion".

The developer of the Salt Cay complex, Mario Hoffman, has also issued legal proceedings. His spokesman, Locksley Ryan, told the local press: "We have no issue about the report itself, that's a matter for the commission [of inquiry] and the TCI [Turks and Caicos Islands]. We simply say there's no reason to mention Salt Cay Devco or anyone associated with it. That is beyond the terms of reference of the inquiry."

Kinay and Hoffman, who have been given notice that the inquiry intends to publish negative comments about them, deny any wrongdoing and complain that the inquiry has failed to give them a chance to rebut the allegations.

Also under scrutiny is the islands' former prime minister, Michael Misick, who along with his wife, LisaRaye McCoy, an actress in the hit American sitcom All of Us, has been the subject ofcorruption allegations, which he denies. Misick has attacked London for flexing its "strong arm of modern-day colonialism".