Digital payments giant PayPal will undertake an urgent audit of its global money transfers business given "ongoing concerns" it is being used by child exploitation rings in Asia.

Key points: The results of the audit will determine whether AUSTRAC takes legal action against PayPal

The results of the audit will determine whether AUSTRAC takes legal action against PayPal AUSTRAC is also investigating Afterpay for its compliance with anti-money laundering laws

AUSTRAC is also investigating Afterpay for its compliance with anti-money laundering laws The regulator's investigation into CBA resulted in a record fine of $700 million

The financial intelligence watchdog has ordered PayPal Australia to appoint an external auditor to probe suspicions that the international funds transfer platform could be used to facilitate online child abuse material.

The Australian Transaction Reports and Analysis Centre (AUSTRAC) said it is investigating PayPal's compliance with international funds transfer obligations to or from Australia.

In a statement, AUSTRAC singled out child sex exploitation as a risk that prompted the regulatory intervention.

PayPal Australia was working with global crime agencies given there is evidence that online payments platforms have been exploited by child sex rings, AUSTRAC chief executive Nicole Rose told The World Today.

"Online child abuse material can be ordered from Australia to areas such as the Philippines in quite often small amounts that are repeated often, and PayPal unfortunately is one of the areas that they can use to do that," Ms Rose said.

"It's a terrible thing — online child abuse material can be ordered by the offender in Australia to sometimes a parent or a relative in a country such as the Philippines and offer money.

"Not a great deal of money to Australians but a great deal of money to Filipino families.

"That's why we want to get the auditor in to really [determine] what sort of risks there have been and continue to be with PayPal systems or their reporting regime."

Responding to the regulator's comments, PayPal said it was "not correct" to suggest the audit was instigated in response to the discovery of child sex exploitation connections.

"The audit requested by AUSTRAC of PayPal's Australian business primarily relates to compliance with international funds transfer instruction reporting obligations," a PayPal spokesperson said.

"Those obligations are important protections in the international fight against financial crime and the misuse of payment platforms, which PayPal takes very seriously.

"Since PayPal's establishment as an independent company in 2015, we have made and continue to make significant investments in our compliance programs, including our anti-money laundering and counter-terrorism financing programs.

"PayPal has a long track record working with global law enforcement agencies to proactively combat child exploitation."

PayPal has 120 days to report back to AUSTRAC with the auditor required to examine the company's record keeping and adherence to international funds transfer rules.

Ms Rose said the outcome of the audit would determine if further regulatory action against PayPal is required.

A spokesperson for PayPal Australia said the company "self-disclosed" an issue relating to international funds transfers to AUSTRAC following an internal review.

"We are working in full cooperation with AUSTRAC to remediate this reporting system issue and to undertake the audit as outlined by AUSTRAC in the time specified," the PayPal spokesperson said.

"There is no impact to our customers, who can continue to use PayPal services as usual."

The latest action from AUSTRAC follows a similar audit ordered on the "buy now, pay later" company Afterpay in relation to compliance with anti-money laundering and counter terror financing laws.

AUSTRAC recently fined foreign currency operator Compass Global $252,000 for failing to report international money transfers that could leave it exposed to money laundering and terror financing.

Last year, AUSTRAC fined the Commonwealth Bank a record $700 million for 53,700 breaches of anti-money laundering and counter terror financing laws.