Kevin Parker has been suspended from BOQ following an inappropriate email he sent last month.
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It is believed the Dubbo councillor and part-time BOQ employee sent the email joking about a "new Disney film" called Jet Black.
The email went on to say the "Aboriginal version of Snow White" had been put on hold due to an industrial dispute.
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"All seven Aboriginal dwarfs, Dealer, Stealer, Mugger, Carjacker, Shoplifter, Drinker, Bludger, have walked off the set," the email reportedly said.
A spokesperson for the BOQ said the bank only became aware of the email after a media organisation bought it to their attention.
"The employee involved has been suspended while BOQ conducts a full investigation into the matter," the spokesperson said.
"BOQ has a strict Code of Conduct and does not condone or accept behaviour that falls below the community, and our own, expectations.
"This incident does not reflect how BOQ aspires to treat our First Nations People and we offer our sincerest apologies."
Cr Parker has been contacted for his response but has not responded.
Member for Dubbo Dugald Saunders said he was "extremely disappointed" about the racist material in the email.
"It is not behaviour I personally adopt, nor is it behaviour I condone," he said.
"While Cr Parker is a member of the Nationals, the email he distributed does not reflect the beliefs of the party as a whole."
Local Government Minister Shelley Hancock said she expected the councillor to receive the "appropriate penalty for this unacceptable behaviour".
"There is no room for racism in our local councils and communities," Ms Hancock said.
"I have instructed the Office of Local Government to work with Dubbo Regional Council to ensure the matter concerning Councillor Parker is dealt with appropriately to uphold community and councillor standards.
"I trust that Code of Conduct provisions will be applied to this councillor in question and that he receives the appropriate penalty for this unacceptable behaviour."
There are a range of consequences for breaching a code of conduct, including suspension of the councillor's payment and disqualification from office.
Deputy mayor Stephen Lawrence has publicly condemned Cr Parker.
In a post on his Facebook page, Cr Lawrence said the community, especially Aboriginal people, were "entitled to expect better from elected representatives".
"I want to say sorry as a councillor for the conduct of my fellow councillor. I hope he does what needs to be done," he said.
Councillor Dayne Gumley has also made a public statement.
"I reject the conduct in its entirety. It is not reflective of my personal values nor is it reflective of Dubbo Regional Council," he said.
Mr Saunders said his staff member, believed to be councillor Jane Diffey was among those who received the email.
"...that person has gone on the record to indicate she believed it to be inappropriate and immediately discarded the email," he said.
Shadow Minster for Local Government Greg Warren has called for the Local Government Minister to launch an investigation into the comments and for him to be suspended from council until an investigation is undertaken.
"Councillor Kevin Parker's actions are disgraceful, distasteful and quite simply, racist," Mr Warren said.
He said the comments were "certainly not representative of the community of Dubbo".