Parent-subsidiary relationships, Conflict of Interest and FSVP

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Can a US-based importer that is a subsidiary of a foreign parent company outsource its FSVP to the Quality Assurance department of its foreign parent company?

A recent response from the FDA Technical Assistance Network (TAN), Case number 189462, affirms that the importer may rely on their foreign supplier (or employee that is a qualified individual) to perform the following activities required under the FSVP regulation (21 CFR Part 1 Subpart L, Section 1.500 - 1.514):

The same FDA TAN response indicated that a foreign supplier would not be able to conduct the following tasks:

  • Approve the foreign suppliers (section 1.505)

  • Establish written procedures to ensure foods are imported from approved foreign suppliers or when necessary, appropriate, and on a temporary basis, unapproved foreign suppliers (1.506)

  • Determine verification activities (1.506)

  • Perform onsite audits of the foreign supplier  

  • Review the foreign supplier’s relevant food safety records (as verification activity under section 1.506)

The reason for the above prohibitions can be found in the FSVP regulations. 21 CFR §1.505(d) prohibits importers to rely on the foreign supplier to perform supplier evaluations and reevaluations:  

If an entity other than the foreign supplier has, using a qualified individual, performed the evaluation...or the reevaluation...you may meet the requirements...by reviewing and assessing the evaluation or reevaluation conducted by that entity. You must document your review and assessment, including documenting that the evaluation or reevaluation was conducted by a qualified individual.” - 21 CFR 1.505(d)

21 CFR §1.506(d)(3) adds another caveat: importers are prohibited from relying on foreign suppliers to determine appropriate supplier verification activities.

You may rely on a determination of appropriate foreign supplier verification activities...made by an entity other than the foreign supplier if you review and assess whether the entity's determination regarding appropriate activities (including the frequency with which such activities must be conducted) is appropriate. You must document your review and assessment, including documenting that the determination of appropriate verification activities was made by a qualified individual.” - 21 CFR 1.506(d)(3)

The same caveat applies to performing supplier verification activities, excluding sampling and testing:

“You may not rely on the foreign supplier itself or employees of the foreign supplier to perform supplier verification activities, except with respect to sampling and testing of food…” - 21 CFR 1.506(e)(2)

Per 21 CFR 1.503 (under the section entitled “Who Must Develop the FSVP and Perform Each of the Activities”), the person who must take responsibility for developing the FSVP and performing each of the activities, is a Qualified Individual (QI):

“A qualified individual must develop your FSVP and perform each of the activities required under this subpart. A qualified individual must have the education, training, or experience (or a combination thereof) necessary to perform their assigned activities and must be able to read and understand the language of any records that must be reviewed in performing an activity.” - 21 CFR 1.503(a)

The QI is not required to be an employee of the importer:

“Qualified individual means a person who has the education, training, or experience (or a combination thereof) necessary to perform an activity required under this subpart, and can read and understand the language of any records that the person must review in performing this activity. A qualified individual may be, but is not required to be, an employee of the importer. A government employee, including a foreign government employee, may be a qualified individual.” - 21 CFR 1.500

Notice that the definition above does not prevent QI from being employees of the foreign supplier. It also does not prohibit the use of multiple QI. FDA clarifies in the preamble (to the FSVP final rule) that an importer need not rely on one QI to perform all tasks. This provides an opportunity for subsidiaries to assign some (not all) tasks to their parent company:

“We did not intend that every qualified individual who performs an FSVP activity would need to have the education, training, or experience needed to perform all FSVP activities—only the activity or activities the person is performing; therefore, we have revised the definition of “qualified individual” to refer to the performance of “an activity required under this subpart””. - Response 45

In section, 21 CFR 1.506(e)(4), titled “Independence of qualified individuals conducting verification activities”, the regulation states:

“There must not be any financial conflicts of interests that influence the results of the verification activities...and payment must not be related to the results of the activity.” - 21 CFR 1.506(e)(4)

FDA provides the reasoning behind this provision in the preamble to the final rule:

"If the qualified individual has a financial conflict of interest that influences the results of verification activities, the qualified individual would be precluded from being able to independently conduct verification activities under the FSVP regulation. We believe that this limitation appropriately ensures that qualified individuals act objectively and are free from any undue commercial pressures that could compromise the performance of verification activities."  Preamble, Response #217

Don’t be led to believe that the phrase, “any financial conflicts of interest” means there can be no conflict of interest. In the final rule, FDA modified the proposed version of the rule to clarify FDA’s intended meaning:

“In the final rule, we have moved this provision to § 1.506(e)(4) and modified it so that it no longer prohibits the existence of a financial interest, but rather prohibits the existence of financial conflicts of interest that influence the results of verification activities…” - Section 7. Independence of Qualified Individuals

FDA recognizes the existence of complex business relationships within the food supply-chain (e.g. parent-subsidiary relationships) and explains their expectations for importers involved in such relationships:

“...We recognize the variety of business relationships that can exist between importers and foreign suppliers, including a parent-subsidiary relationship or an affiliate relationship. Regardless of how the two entities relate to each other, the conflict of interest provisions in § 1.506(e)(4) are designed to maintain the integrity of the verification activities performed as part of an importer's FSVP. Section 1.506(e)(4) does not prohibit an importer or its employee from conducting a verification activity even if the foreign supplier is an affiliate, subsidiary, or parent company of the importer... Nevertheless, any financial conflict of interest that may exist cannot influence the results of the verification activity. We expect that if an importer or its employee conducts a verification activity for a foreign supplier that is an affiliate, subsidiary, or parent company of the importer, there will be protections in place to ensure the integrity of the verification activity, including, for example, ensuring that the individual conducting the verification activity is not penalized for identifying food safety concerns. In addition, any payment for the verification activity cannot influence the results of the activity.” - Response #218

In another preamble response, FDA provides an example of how an importer can address conflict of interest:

“An importer could, for example, ask the qualified individual to attest to whether it has any financial interest in the foreign supplier and, if the qualified individual has one, take steps to ensure that any such interest does not influence the results of the verification activity. The final rule does not per se prohibit the qualified individual from holding any stock or having ever had any dealings with the entity that is the subject of the verification activities.” - Response #219

In the FSVP guidance, FDA addresses conflict of interest twice (K.26 and K.29), which reiterates statements made in the preamble to the final rule. However, worth noting is the suggestion FDA makes below:

“To ensure that a qualified auditor or qualified individual who conducts a supplier verification activity on your behalf does not have a financial conflict of interest with your foreign supplier, you may want to request that the person provide you with a written, signed, no-conflict-of-interest statement.” - K.29

Training importer staff or relying on a consultant or 3rd party, rather than the foreign supplier, are a few alternatives that an importer ought to consider. Another option is to shift responsibility for the FSVP to another U.S. Owner or Consignee:

U.S. owner or consignee means the person in the United States who, at the time of U.S. entry, either owns the food, has purchased the food, or has agreed in writing to purchase the food. - 21 CFR 1.500

If an importer chooses to rely on a supplier that is a parent company, or is commonly owned (i.e. an affiliate) to assist with developing the importer’s FSVP, steps ought to be taken (and documented) by the importer to prevent a conflict of interest that could influence the results of the importer’s verification activities.

If you need assistance with avoiding conflicts of interest or FSVP consulting and training services, please do not hesitate to contact us or set up a time to chat.

- Michael Kalish, michael@foodsafetyguides.com