In a groundbreaking development for the music streaming industry, federal investigators have brought indictments against a musician from North Carolina for allegedly orchestrating a sophisticated scheme that utilized bot accounts and AI-generated songs to amass over $10 million in royalty payments from major streaming services. The U.S. Attorney's Office for the Southern District of New York has dubbed this the first criminal case involving artificially inflated music streaming.

The indictment reveals that Michael Smith, a 52-year-old musician from North Carolina, has been running an intricate music streaming manipulation operation for the past seven years, falsely profiting from billions of streams originating from bot accounts. Prosecutors state that Smith estimated being able to generate approximately 661,440 streams per day using the bot accounts, resulting in annual royalties of $1,207,128.

Smith now faces charges of wire fraud conspiracy, wire fraud, and money laundering conspiracy, which carry a combined maximum sentence of 60 years in prison if convicted. Damian Williams, U.S. Attorney for the Southern District of New York, condemned Smith's audacious fraud scheme, emphasizing that it robbed legitimate musicians, songwriters, and rights holders of their rightful royalties. Williams expressed gratitude to the FBI and his team of prosecutors for their efforts in bringing Smith to justice.

The music industry has been grappling with the issues of streaming fraud and AI-generated music, which controversially impact artists and revenue streams. Major labels have voiced concerns that streaming fraud dilutes the royalty pool and diverts revenue away from genuine music creators. Similarly, the ease at which AI can produce songs has raised fears that it exacerbates these problems.

To address such concerns, Spotify recently implemented a policy requiring a minimum of 1,000 streams before creators can earn revenue from their songs. Streaming payments are distributed using a proportional model, with artists receiving payment based on their share of the overall streaming consumption. Thus, the fraudulent activity described in the indictment diverted rightful royalties away from genuine artists whose music was legitimately streamed by real listeners.

According to the Department of Justice, Smith acquired thousands of email accounts through bulk vendors to sign up for streaming services. At one point, he had around 10,000 bot accounts registered on platforms such as Spotify, Apple Music, and Amazon Music. Given the labor-intensive process of setting up these accounts, Smith allegedly hired individuals in both the U.S. and abroad to assist him. Additionally, he purchased family plan accounts as a cost-effective means to enroll his bots.

To conceal the illegitimate nature of his activities, Smith utilized a New York-based service that provided debit cards to employees. He provided this service with fabricated names, posing them as his employees to give the payments a veneer of legitimacy.

To evade detection by streaming services, Smith distributed the streams from his bot accounts across thousands of tracks rather than focusing on a small number. This method made it more challenging for the platforms to identify the fraudulent behavior, as stated in an email referenced in the indictment.

In his early attempts, Smith reportedly tried using the music catalog of a publicist and offered to sell streams to other artists. However, these strategies proved unsuccessful. By 2018, he turned to artificial intelligence to facilitate his streaming farm. He worked intricately with the CEO of an AI music company (referred to as "co-conspirator three" in the indictment) and an unnamed music promoter to produce hundreds of thousands of AI-generated songs.

Over time, the quality of the AI-produced tracks improved, making them increasingly difficult to detect by streaming platforms. In February, Smith allegedly claimed that these songs had generated over 4 billion streams and $12 million in royalties since 2019.

Despite receiving multiple claims of streaming abuse from various outlets, Smith repeatedly denied involvement in streaming fraud when confronted by the music distribution company he used. He protested against the removal of his music and demanded proof of the alleged artificial activity.

The indictment also revealed a case from last year involving the Mechanical Licensing Collective, which withheld payment to Smith due to fraud concerns. Smith and his representative allegedly lied to the collective, asserting that the music was entirely his work and not computer-generated.

Kris Ahrend, the CEO of the Mechanical Licensing Collective, commented on the indictment, highlighting its significance in shedding light on the pressing issue of streaming fraud within the music industry. Ahrend emphasized the collective's efforts to combat fraud and safeguard the rights of songwriters.

This landmark case brings to the forefront the challenges faced by the music streaming industry in combating fraudulent activities and protecting legitimate artists. As the legal proceedings unfold, the outcome will undoubtedly set a precedent in the ongoing battle against illicit practices in the digital music landscape.