Fonterra Co-operative Group has suspended a distribution agreement with China's Jiawai after Shanghai food safety officials and police announced the arrest of 19 people suspected of repackaging expired milk powder from New Zealand.
Jiawai had been an authorised distributor in China for Fonterra since March but the product was believed to have been onsold by a former Jiawai employee before any contact with the NZ company, Fonterra said.
The product had been in the resale market, having been sold over and over, and until the investigation was complete it wasn't possible to say where the distribution chain had descended into criminality, the company said.
A spokeswoman said Fonterra is being "hyper-vigilant" given the sensitivities around new rules for food safety in China.
In words attributed to Teh-Han Cho, president NZMP, Greater China, the company said it believed the arrests stemmed from "an isolated criminal incident" and it was satisfied that Chinese authorities had acted quickly to arrest those involved.
The original reports said the out-of-date milk powder was being sold by a Shanghai-registered trading firm, Jiang Di International Trade Co, not Jiawai, which was elsewhere in the distribution chain.
Not all of the 276 tonnes of milk powder had been sold through the online channels, those reports said.
Fonterra's Teh-Han said the company has severed links with Jiawai.
"It is our understanding from reports that part of the current investigation in China relates to Fonterra product that a former Jiawai employee may have onsold to others prior to our contract with them," he said.
"Because we aren't part of the official investigation we have very limited access to the real facts and need to be overly cautious, as a result, we've suspended Jiawai's status as an authorised distributor. It's important to remember that in this case, Jiawai was not one of our authorised distributors at the time of the alleged activity."
Teh-Han added "we fully support" the actions of Chinese authorities "who have acted strongly and swiftly to investigate and arrest the people they believe are responsible for this.
"Our normal process in any event of this nature is to confirm our own systems are robust, which is underway." Among those implicated is Jiawai's former general manager, Minggang Liu.