What a predicament, but unfortunately if your daughter is over the age of consent, then she is by all rights and purposes considered an adult and therefore she can do what she likes.
Whilst you can make your feelings known to her, in the end its up to her, but in my mind, even if the chap she is with is innocent, how could she, as a mother take that risk.
In most countries now (I live in the UK), there is a Sex Offenders Register. You could check to see whether this chap is on there. Has any of his court trials been reported in the news. Have you Googled this chaps name on the internet.
One thing that you could do is make your Social Services aware of the situation and if they find out that he is a proven sex offender, they could take the children out of the home, where you could have the chance of caring for them, but you must also bear in mind, that if you go down this route, there is also the possibility that the children could be unobtainable to you too.
In taking this is drastic action, could you live with your daughter not speaking to you ever again or you not seeing the grandchildren, cos this is what it could amount to. Think very carefully before you speak to anybody in authority.
On the other hand, if you feel the children could be harmed, and you have a watertight case on this, then contact Social services right away.
Not knowing what your daughter is like, you should also be aware that if she has too much pressure on her from yourselves, she could just stop you having contact with the children alogether. I would tread carefully.
Personally, I think your daughter is crazy for wanting to be with someone who is even suspected of being a sex offender. Where is her head?
I wish you the very best of luck with this and if you need to talk, just get in touch.