The AOC also decided on Saturday that D'Arcy and Monk will be banned from using social media for the Games' period, with the pair forced to pay a price for posting pictures online of themselves brandishing high powered weapons in a US gun shop.
D'Arcy and Monk have been denied the chance to let their hair down amongst fellow athletes at the Olympic Village once their commitments finish and will be sent home to Australia.
The Team Executive ruled their conduct brought themselves into disrepute.
Chef de Mission, Nick Green, sent a letter to both athletes explaining the decision.
"Given this incident and our previous discussions concerning your conduct, I now have concerns regarding your lack of judgment," the letter said.
"As a member of the 2012 Australian Olympic Team, and as I have reminded you on previous occasions, it is an honour and a privilege to be a member of an Australian Olympic Team.
"Australian Olympians are required to meet very high standards of conduct and we cannot risk the reputation of the Team through non-compliance with the Team Membership Agreement."
The AOC will arrange for both swimmers to leave the Olympic Village on August 4 to return to Australia, presuming they are not required for the final session of the swimming program in London.
The Selection Committee which comprises Green, Deputy Chef Chris Fydler and AOC Secretary-General Craig Phillips, expressed their disappointment saying both athletes were "repeat offenders who had shown poor judgment in their decision-making."
"We are prepared to allow them to compete but we have four hundred other Team members to consider and we are not going to have them distracted," the committee said.
"It is too big a risk".
Green said the decision to allow them to compete had nothing to do with the possibility of the pair winning medals in the pool.
"This has nothing to do with medals; it is all about upholding Team values, in particular the high standards of behaviour set by those Olympians who came before you".
The action taken is separate to any investigation being carried out by Swimming Australia.
D'Arcy and Monk returned to Australia on Friday and quickly apologised for the photos, which appeared on Facebook and Twitter before being pulled down by Swimming Australia.
The 24-year-olds will meet with Swimming Australia officials next week.
D'Arcy is a medal hope in the 200m butterfly in London, while Monk is in the 4x200m freestyle relay team.
Neither is new to controversy.
D'Arcy was kicked off the 2008 Olympic team after assaulting former swimmer Simon Cowley in a bar, leaving him with multiple facial injuries.
He then declared himself bankrupt last year when a court ordered him to pay Cowley $370,000 in costs.
Last year, Monk avoided charges after telling police he was the victim of a hit and run accident but later confessed he broke his elbow when he fell off his skateboard.