Spain's Banco Santander offered $1.7 billion to reimburse clients who lost money in financier Bernard Madoff's alleged pyramid scheme in the U.S. on Tuesday.

Spain's largest bank, one of the institutions hardest hit in the scandal, said it was offering the compensation to private customers. It made no mention of institutional investors.

The bank said in a statement that it acted with "due diligence" when one of its funds, Optimal Strategic US Equity, commissioned Madoff to handle investments by some Santander clients.

The bank says it is offering to give clients back their initial investment, in the form of preferred securities, but not interest accrued through Madoff funds.

These preferred securities will have an annual coupon of 2 percent, the bank said.

"The Group has taken this decision in view of the confluence of exceptional circumstances in the case at hand and on the basis of exclusively business considerations, namely the Group's interest in maintaining its business relationships with those clients," the statement said.

"Grupo Santander has acted at all times with the due diligence in the management of its clients' investments in the Optimal Strategic fund and in accordance with all applicable laws and sound banking practices and procedures with respect to those investments," it added.

Santander, one of Europe's largest banks by market capitalization, is one of the companies most hurtin the $50 billion scam allegedly run by Madoff. It has said it has total exposure of $3.1 billion in the case, the vast majority of it in client money, not its own.

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Click here to read the case against Bernie Madoff. (pdf)