Oxfam has been hit by a series of allegations after it emerged in The Times newspaper that the organisation covered up concerns that senior aid workers in Haiti following the 2011 quake, including country director Roland van Hauwermeiren, had paid vulnerable women and children for sex.
International Development Secretary Penny Mordaunt said Oxfam had failed to show "moral leadership" and had failed to properly inform donors, regulators and prosecutors about the actions of its workers.
The British government has also threatened to cut off funding to Oxfam or any other aid agency that doesn't cooperate with the government's efforts to rein in misconduct.
On Monday the deputy head of Oxfam resigned over what she said was the charity's failure to respond adequately to the allegations of sexual misconduct by some of its staff in Chad as well as in Haiti.
Ms Mordaunt said her department had created a new safeguarding unit which would "urgently look into how we can stop sexual abusers and predators being reemployed by charities" including the possibility of a global register of aid workers.
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British charity Oxfam on Wednesday said more than 1,200 people had discontinued their regular donations to the organisation while allegations of a sexual misconduct scandal surfaced.
In response to this scandal, Oxfam claims to have already conducted its own investigation into the case in 2011, following which four of these employees were sanctioned and three others preferred to resign, including its Country director, Belgian Roland van Hauwermeiren, who was regularly receiving prostitutes in his villa.
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Britain's charity watchdog has opened an inquiry into how Oxfam handled the allegations of sexual abuse in Haiti in 2011.
"It is now clear that these allegations - involving the use of prostitutes and which related to behaviour of both the country director and members of his team in Chad - were raised before he moved to Haiti", she said.
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"We have immediately contacted Save The Children to establish whether they have any knowledge of and/or hold any records about these reports either at the time of the merger or subsequently and if so to ask them to urgently disclose this information to us", a Charity Commission spokesperson said.
The Scottish Government has awarded Oxfam Scotland more than £7 million in funding since 2008.
"In no uncertain terms do I plan to continue my support of this organisation or its leaders", she told The Telegraph.
A spokeswoman told Sky News: "This clearly raises issues for United Kingdom charities about recruitment, vetting and references for charity personnel, particularly in the context of worldwide aid work to ensure that people who pose a significant risk to charities, their work and reputation are not allowed to infiltrate the charity sector".
The scandal has bolstered critics of Britain's commitment to spend the equivalent of 0.7 percent of economic output on foreign aid.
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