Franze, who joined Penrith from their NRL rivals Cronulla Sharks earlier this year, will link up with the Exiles next month when his current rugby league commitments finish.
He has agreed a two-year contract, and will look to make an immediate impact in the Premiership after recovering from a serious knee injury.
"I wanted to play top-class rugby union, and decided to join London Irish because I was excited by the club's ambition," he said.
Franze, 23, has played for Australia's Junior Kangaroos representative side, with more than 60 NRL appearances under his belt.
"Paul is a dynamic runner and a lethal defender," said Exiles rugby director Brian Smith.
"He will fit in with our other powerful backs Scott Staniforth, Dominic Feau'nati, Rodd Penney and James Storey, and I have no doubt he will make a big impression in the Premiership."