Chief Executive Brian Hartzer initially refused to step down but has now announced he will quit on December 2 after mounting pressure from investors and the public.
Hartzer will receive a payout of 2.69 million Australian dollars (1.82 million US dollars).
Hartzer will be given 12 months' notice and paid out A$2.7m in salary, but will forfeit all bonuses.
Both the Chief Executive and chair of No. 3 lender National Australia Bank stood down after being singled out in the Royal Commission for failing to accept responsibility for company wrongdoings.
Hartzer said: "As CEO, I accept that I am ultimately accountable for everything that happens at the bank".
Current chief financial officer, Peter King, will be taking over as acting CEO effective on that date. King introduced his retirement in September, however will stay till the appointment of a everlasting substitute.
Amid the bloodletting, Westpac board chairman Lindsay Maxsted announced that he would bring forward his retirement to "the first half of 2020", while long-standing director Ewen Crouch does not plan to seek re-election.
"As was appropriate, we sought feedback from our stakeholders, including shareholders, and having done so it became clear that board and management changes were in the best interest of the bank", Mr Maxsted said.
The suit against Westpac alleges that between 2013 and 2019, the bank failed to report more than A$11b in payments into and out of Australia, mostly using a bank-to-bank system originally created to help facilitate pensions transfers.
Australian gran wins Malaysia death sentence appeal
Maria Elvira Pinto Exposto (C) is escorted by Malaysian customs officials as she arrives court in Sepang on March 26, 2015. He said the scam had lasted a couple of years and Ms Exposto had even sent money to "Smith" before flying to Shanghai.
Each breach could attract a civil penalty between $17 million and $21 million.
Australia's financial intelligence agency AUSTRAC said the bank committed 23 million breaches of money laundering and counterterrorism rules, theoretically putting the bank on the hook for up to Aus$483 trillion (US$330 trillion) in fines.
"These alleged breaches are of the most serious nature, and there needed to be accountability", Treasurer Josh Frydenberg told reporters in Canberra.
"We don't have all the details", he said, adding it appeared that Westpac had been offered an update to protections for its offshore payments system, LitePay, which it did not adopt.
Health Minister Greg Hunt told reporters on Tuesday the leadership changes were "appropriate" and "necessary".
"This stems from the strongest and clearest comments from the Prime Minister and the Treasurer on the expectations of the community and the government's expectations of what constitutes a serious and deep breach", he mentioned.
Hartzer joined Westpac as head of its Australian financial services unit in 2012, before being named CEO in early 2015.
Final 12 months, the Commonwealth Financial institution had been fined as much as A $ 1 trillion, after AUSTRAC discovered that it had not declared 53,500 transactions. It negotiated a 700 million Australian greenback settlement.