City were found guilty of serious financial rule breaches covering nine seasons between 2009-10 and 2017-18. The Premier League alleged that the club used sham commercial agreements to inflate revenue and understate costs by more than 900 million pounds.
Manchester City have denied the allegations and said the independent commission's ruling contained significant errors of law, principle and fact. The club has appealed against the decision.
Marsch, who managed Leeds United between 2022 and 2023, said the financial differences between clubs were obvious during his time in the Premier League.
"I think Man City should be punished severely. I think they should have to go down, and by the way, everyone knew about it. Everyone knew," Marsch told The Guardian.
The former Leeds boss highlighted the summer of 2022 as an example of the different financial situations facing clubs.
Leeds sold Raphinha to Barcelona and Kalvin Phillips to Manchester City during that transfer window. Marsch said Leeds were one of the few clubs able to report a profit because of those sales.
"That summer, us and Man City were the only teams that said we made money," he said.
"For us, we did make money, because we sold Raphinha, we sold Kalvin Phillips. We had a lot left over from what we bought.
"At the time, we weren't in a position financially to not save. Our ownership didn't have deep pockets. Whereas when Man City says this, I was literally like, 'Are you kidding me? Is this some kind of joke?'"
Marsch also questioned the reported fee for City's signing of Erling Haaland from Borussia Dortmund that summer.
"When they said they got Erling Haaland for 52 million pounds, it's like: 'Yeah, OK, sure!'" Marsch said.
"So, I knew there were inconsistencies in it, but what can you do? You just put your arms in the air and go, 'This is football.'"
Manchester City's appeal will be considered privately by an independent three-member panel.
Possible punishments include fines, points deductions and other sporting sanctions, with relegation and the removal of titles among the potential outcomes that have been discussed.
However, it remains unclear whether any punishment would be imposed before the appeal process is completed.
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