A North Carolina-based musician is facing criminal charges for allegedly collecting millions of dollars in royalties on AI-generated tunes as part of a huge music streaming fraud scam.
The United States Attorney’s Office for the Southern District of New York announced the indictment today, describing it as the “first criminal case involving artificially inflated music streaming.” Despite AI music generators’ relatively recent emergence into the commercial mainstream, the 18-page indictment shows that the accused music streaming fraud operation began in 2017.
The alleged scam, which included Spotify, Amazon Music, Apple Music, and YouTube Music, continued into 2024, delivering a total of $10 million in royalty payments to which the defendant, Michael Smith, “was not entitled,” according to the indictment.
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According to the same court statement, Smith ramped up the alleged streaming fraud by creating a massive track collection, which was aided by a 2018 collaboration with the leader “of an AI music company.”
With this unnamed AI company producing hundreds upon thousands of recordings (in exchange for a portion of the alleged scheme’s earnings), Smith allegedly oversaw a “labor-intensive” attempt to create “bot accounts” on the aforementioned platforms.
The defendant allegedly coordinated with co-conspirators in the United States and elsewhere, focusing on multi-account Family plans and spreading streams among a slew of AI tracks to avoid arousing suspicion. (Incidentally, Spotify no longer pays recording royalties for uploads with fewer than 1,000 annual streams, which may have altered the calculation slightly.)
Between 2020 and 2023, the defendant reportedly “transferred $1.3 million in fraudulently obtained royalties to a bank account he controlled at a U.S.-based financial institution.”
The proceeds were then allegedly transferred to a Manhattan-based distributor of corporate debit cards, which was duped into believing that made-up names (each linked to an email address and streaming account) worked for Smith’s company.
Aside from the numerous other elements linked with the implementation of the intricate alleged scam, the debit cards were allegedly utilized to pay for the bots’ streaming subscription.
In 2017, Smith allegedly stated in an email that he had 52 cloud services accounts, each of which 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 accusation continues, “and thus SMITH could generate approximately 661,440 streams per day.” SMITH calculated that the average royalty per stream was half a cent, resulting in daily royalties were $3,307.20, monthly royalties of $99,216, and annual royalties of $1,207,128.
While the indictment does not go into detail concerning copyright issues, Smith is accused of lying to his distributor for several years when confronted with streaming and royalty irregularities. (In addition to the aforementioned annual streaming minimum, Spotify is now fining distributors for fraudulent plays.)
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Though it is not uncommon for AI music and even non-music uploads (such as white noise, which Spotify and others have also cracked down on at the request of Universal Music Group) to generate recording royalties, the defendant in this case went a step further by allegedly collecting compositional royalties as well.
According to the accusation, the Mechanical Licensing Collective became aware of the defendant’s audacious move and “halted royalty payments to” him in March or April 2023.
“Today’s DOJ indictment shines a light on the serious problem of streaming fraud for the music industry,” MLC CEO Kris Ahrend said in an email 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, creating and distributing AI music is not illegal, as long as the works do not violate protected media. However, in addition to the charges of bot-powered fake-streaming, the defendant is charged with wire fraud and money laundering conspiracy.
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