"We have to mark this serious breach with a points deduction," said panel chairman Gareth Rees QC.
“We are particularly disappointed for the players, who've given everything they can for the club, and ultimately it is they who have been punished for something completely beyond their control.”
Tony CopseyLondon Welsh CEO
"We must acknowledge the impact on the integrity of the game."
New Zealander Tyson Keats played 10 Premiership games for Welsh after former team manager Mike Scott had falsified a player registration form to say the scrum-half had been born in Christchurch in Dorset instead of Christchurch in New Zealand.
But the panel, which acknowledged "exceptional circumstances" in the case, found that Welsh had benefitted for too long from being able to select Keats.
Exiles chief executive Tony Copsey said the club was "hugely disappointed" by the decision.
"We are particularly disappointed for the players, who've given everything they can for the club," he added. "Ultimately it is they who have been punished for something completely beyond their control.
London Welsh punishment 'lenient' - Diamond
"However, there are still four games remaining in the season and the focus and efforts of the players, the coaching staff and everyone at London Welsh is now on those remaining matches."
The Exiles, who only won promotion to the top flight last season, lie five points adrift of Sale Sharks in the table.
They travel to Bath this weekend before entertaining Northampton on 14 April. After an away game at London Irish on 20 April, they end the campaign at home to Worcester on 4 May.
A London Welsh statement said:
"The club welcomes the panel's decision to remove the suspended five-point penalty imposed until the end of the 2013-14 season and believes that this action justifies its decision to appeal.
"The club also believes that this cause of action was necessary to restore the good name of the London Welsh RFC.
"Once it became clear what had happened, the club made every effort to 'remedy the situation' and did not, at any stage, deliberately attempt to deceive the RFU - a point acknowledged by the panel in their findings.
"The club maintains, however, that it has ultimately been punished for the completely unnecessary fraudulent actions of one individual, whose actions the panel accepted 'could not have been predicted'."
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