German publication Der Spiegel claims to have seen documents from whistleblowers Football Leaks that show City paid Emeka Obasi £200,000 as part of the scouting contract to find players in South and Central America.
Der Spiegel alleged this payment was actually in relation to Sancho's move from Watford as a 14-year-old, with the process arranged to circumvent FIFA rules that prevent agent fees being made in transfers involving minors.
It has also claimed to have seen an e-mail sent to Sancho's father outlining what salary and bonuses he would receive once he turned professional. According to the report, a club lawyer later intervened stressing the letter was not an offer.
In a statement to Omnisport, an FA spokesperson said on Tuesday: "We can confirm that the FA will be investigating the allegations."
City stated they would not comment on reports based on documents purported to have been obtained illegally, while they contended Der Spiegel's claims that the club refused to offer a response to their story.
A statement from a City spokesperson last Friday read: "In relation to the story published by Der Spiegel, and contrary to their assertion that Manchester City FC did not respond to their query – please see below statement which was sent to them earlier this week.
"You will have seen this statement before. However, it is important to use it in full, as each element is material, as we pointed out to Der Spiegel in our reply.
"We will not be providing any comment on out-of-context materials purported to have been hacked or stolen from City Football Group and Manchester City personnel and associated people. The attempt to damage the club's reputation is organised and clear."
Sancho spent two years at City before leaving for Borussia Dortmund to improve his chances of regular first-team football.
Now 18, the winger has developed into a star for the Bundesliga leaders, with eight goals and 10 assists in 16 league starts this season.