The agreement will avoid a lawsuit from Irving Picard over claims linked to hedge fund investments made with Mr Madoff by Santander's Optimal arm.
Mr Picard said the settlement amounted to around 85 per cent of his claim against the Spanish bank.
Once it is paid, he will have collected approximately $1.22 billion for victims of Mr Madoff's $65 billion Ponzi fraud.
"The funds' potential clawback liability did not imply any wrongdoing by the funds," the bank said in a statement reported by Bloomberg.
Santander has already paid compensation to private banking clients affected by the scandal. Their combined losses stood at â¬1.38 billion ($1.92 billion).
However, according to Bloomberg the bank could still face a class-action lawsuit filed by a number of South American investors, who contest that it failed to carry out proper due diligence on its investments with Mr Madoff's firm.
The former Nasdaq chairman pleaded guilty to orchestrating a Ponzi scheme in March. He faces up to 150 years in prison.