The bank is facing a potentially huge fine over claims that it failed to report millions of global fund transfers, including "high-risk transactions" to southeast Asian nations potentially linked to child exploitation.
Australian Transaction Reports and Analysis Center (AUSTRAC) Chief Executive Officer Nicole Rose said the decision to lodge the suit against Westpac Bank was made after a detailed investigation revealed "serious and systemic non-compliance" breaches.
Australia's Westpac Banking Corp said on Tuesday its CEO will step down and its chairman will bring forward his retirement as a money-laundering scandal rocks the country's second-largest retail bank.
"As appropriate, we solicited feedback from our stakeholders, including shareholders, and it became clear that changes to the board and management were in the best interest of the bank", mentioned Maxsted.
Westpac said chief financial officer Peter King would act as chief executive while a successor was being chosen.
King announced his retirement in September, but is to remain until a permanent replacement is appointed.
The financial institution is suspected of failing to report 19.5 million worldwide fund transfers valued at greater than USA $ 7 billion between November 2013 and September 2018.
But in its submission to the Federal Court, Austrac noted that each of the 23 million breaches it said Westpac had committed can carry a civil penalty of A$17-21 million.
Cabinet minister Greg Hunt said the Westpac's resignation was an appropriate and necessary step.
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"I've had conversations with Westpac and those discussions were constructive", he added.
"It follows the strongest, clearest comments from the prime minister and the treasurer about community expectations, and government expectations, in the face of what is a serious and profound breach", he said.
In response to the accusations, Australian Attorney-General Christian Porter said failing to abide by money-laundering laws has the potential to facilitate "the most horrendous crimes". "But actually for people in mainstream Australia going about their daily lives, this is not a major issue, so we don't need to overcook this", the CEO had said, according to the paper.
The Commonwealth Bank a year ago faced a theoretical maximum fine of 1 trillion Australian dollars after AUSTRAC found it had failed to report on 53,500 transactions.
In February, soon after the Royal Commission's final report was published, the CEO and chair of the third-largest lender, National Australia Bank, stood down after being singled out in the document for failing to accept responsibility for the bank's wrongdoings.
It reported the total value of these transaction was in excess of 11 billion Australian dollars (7.5 billion US dollars).
It announced chief executive Brian Hartzer would leave the job next week, while another director would not seek re-appointment and the chair would bring forward his retirement.
Westpac's share price jumped by 1.84% during local trading following the news.
Westpac has an annual common assembly scheduled for December 12.