The bank's chair Catherine Livingstone said in a statement to the stock exchange that Ian Narev "will retire by the end of the 2018 financial year".
Narev faced calls to step down last week after the financial intelligence agency AUSTRAC launched a civil action against the bank alleging "serious and systemic non-compliance" of the laws more than 53,000 times.
The 50-year-old initially insisted he would stay on but Livingstone said Monday that the bank wanted to end speculation over his future.
"Succession planning is an ongoing process at all levels of the bank. In discussions with (Narev) we have also agreed it is important for the business that we deal with the speculation and questions about his tenure," she said.
"Today's statement provides that clarity and will ensure he can continue to focus, as CEO, on successfully managing the business."
New Zealand-born Narev took over the top job at the Commonwealth in late 2011.
He had previously been involved in its private banking arm and before that worked as a corporate lawyer.
His tenure has delivered bumper returns for shareholders, including a record Aus$9.93 billion (US$7.86 billion) annual net profit unveiled last week.
But it has also been marred by scandals over poor financial planning advice, insurance payouts and the latest allegations of money laundering.
The Commonwealth Bank is accused of failing to deliver to AUSTRAC on time 53,506 reports for cash transactions of Aus$10,000 (US$7,900) or more at its cash deposit machines between November 2012 and September 2015, with a total value of Aus$624.7 million.
It also failed to report suspicious transactions on time, or at all, that totalled Aus$77 million, and did not monitor customers or manage the risk even after becoming aware of suspected money laundering, AUSTRAC claimed.
Each breach could attract Aus$18 million (US$14 million) in fines, potentially running into the billions of dollars.
Australia's corporate regulator ASIC on Friday said it would also probe how the lender, the country's largest firm by market capitalisation, handled the alleged breaches.
CBA on Wednesday posted a 7.6 percent jump in annual net profit to a record Aus$9.93 billion for the year to June 30.
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