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Fifa have banned Chelsea from registering any new players in the next two transfer windows.
The world's governing body have handed down the punishment after French clubs Lens made an official complaint over Chelsea's signing of their young player Gael Kakuta in 2007.
Fifa's Dispute Resolution Chamber (DRC) has now found in Lens' favour and ruled that the Blues are 'jointly and severally liable'.
As such, the Stamford Bridge club have been banned from signing players over the next two transfer windows, which means they will not be able to bring in any new faces until 2011.
18-year-old Kakuta, a regular in Chelsea's reserve side, has also been banned from playing for the next four months and fined £680,000.
Chelsea are also liable over Kakuta's fine, and they also will have to pay Lens £113,000 in compensation.
A Fifa spokesperson stated: "This decision confirms our aim to ensure contractual stability. It is an important ruling for football in general."