A North Carolina-based musician has been indicted in connection with an alleged music streaming fraud scheme. Photo Credit: Igor Omilaev
A North Carolina-based musician is facing criminal charges for allegedly racking up millions in royalties on AI-generated tracks as part of a massive music streaming fraud scheme.
The U.S. Attorney’s Office for the Southern District of New York today announced the indictment as the “first criminal case involving artificially inflated music streaming.” Despite AI music generators’ relatively recent entry into the commercial mainstream, the 18-page indictment indicates that the alleged music streaming fraud scheme kicked off way back in 2017.
Said alleged scheme, extending to Spotify, Amazon Music, Apple Music, and YouTube Music alike, even carried on into 2024, delivering a cumulative $10 million or so in royalty payments to which the defendant, one Michael Smith, “was not entitled,” according to the indictment.
As described in the same legal text, Smith took the alleged streaming fraud into high gear by developing a voluminous library of tracks – a move powered by a 2018 tie-up with the head “of an AI music company.”
With this unnamed AI company pumping out (in exchange for a cut of the alleged scheme’s revenue) thousands upon thousands of tracks, Smith allegedly spearheaded a “labor-intensive” effort to register “bot accounts” on the above-mentioned platforms.
Allegedly coordinating with co-conspirators based in the States and abroad, the defendant for obvious reasons allegedly zeroed in on multi-account Family plans and spread streams out across a multitude of AI songs so as to avoid raising suspicion. (Incidentally, Spotify no longer pays recording royalties on uploads with fewer than 1,000 annual streams, a development that may have shifted the math a bit.)
Between 2020 and 2023, the defendant allegedly “transferred $1.3 million in fraudulently obtained royalties to a bank account he controlled at a U.S.-based financial institution.”
From there, the proceeds were allegedly shifted to a Manhattan-based provider of corporate debit cards, which was allegedly misled into believing that made-up names (each tied to an email address and streaming account) were employees of a company owned by Smith.
Moving beyond the many other details associated with the execution of the convoluted alleged scheme, the debit cards were allegedly used to pay for the bots’ streaming subscriptions.
And in 2017, Smith in an email allegedly relayed “that he had 52 cloud services accounts, and each of those accounts had 20 Bot Accounts on the Streaming Platforms, for a total of 1,040 Bot Accounts.
“He further wrote that each Bot Account could stream approximately 636 songs per day,” the indictment proceeds, “and so in total SMITH could generate approximately 661,440 streams per day. SMITH estimated that the average royalty per stream was half of one cent, which would have meant daily royalties of $3,307.20, monthly royalties of $99,216, and annual royalties of $1,207,128.”
While the indictment doesn’t dive too far into rights-related specifics, Smith allegedly lied to his distributor for multiple years when confronted about streaming and royalty abnormalities. (Besides the aforementioned annual-stream minimum at Spotify, the platform is now fining distributors themselves for fake plays.)
Though it’s hardly a new phenomenon for AI music and even non-music uploads (like white noise, which Spotify and others have also cracked down on at the behest of Universal Music Group) to generate recording royalties, the defendant here took things a step further by allegedly raking in compositional royalties to boot.
As described in the indictment, the Mechanical Licensing Collective caught wind of that decidedly bold maneuver and then “halted royalty payments to” the defendant in March or April of 2023.
“Today’s DOJ indictment shines a light on the serious problem of streaming fraud for the music industry,” MLC CEO Kris Ahrend added in a statement emailed to DMN. “As the DOJ recognized, The MLC identified and challenged the alleged misconduct, and withheld payment of the associated mechanical royalties, which further validates the importance of The MLC’s ongoing efforts to combat fraud and protect songwriters.”
Of course, it’s not illegal to create and distribute AI music – provided that the works aren’t infringing on protected media. However, bearing in mind the bot-powered fake-stream allegations and more, the defendant is being accused of wire fraud and money laundering conspiracy.
