Just two months ago, the major labels in the music industry were expressing concern about the future. Sony, Warner, Universal, and others were demanding financial compensation for damages to those in charge of the Suno Ai and Udio services. A recent case uncovered in the U.S. is a consequence of the ongoing conflict between music and AI, with no resolution in sight. It serves as a warning to others in the industry.
The producer no one knew. Michael Smith, 52, of Cornelius, North Carolina, claimed to be a musician and music producer. Despite having only a small catalog of music of his own, he managed to earn over $10 million in royalties from streaming services in a short period.
At some point, the industry became suspicious, which prompted the FBI to investigate. The findings revealed one of the biggest frauds in the music industry and streaming services like Spotify. As a result, Smith could potentially face up to 60 years in prison.
Fraud uncovered. On Wednesday, the FBI arrested Smith on multiple felony charges for allegedly swindling more than $10 million in royalties. To do this, he supposedly used hundreds of thousands of AI-generated songs.
According to the indictment, Smith created thousands of bot accounts on platforms such as Spotify, Amazon Music, and Apple Music. He then used the accounts to automatically stream the AI-generated music he had placed on the platforms. This elaborate scheme eventually generated up to 661,440 streams per day, leading to annual royalties of $1.2 million.
Royalties. The indictment further explained that these royalties were drawn from a royalty fund that streaming platforms are required to set aside for artists who stream sound recordings that incorporate musical compositions.
Why did no one suspect anything until recently? Something didn’t add up when the case was uncovered. According to federal prosecutor Damian Williams, Smith began cheating musicians and songwriters in 2017 by preying on the money for music royalties available to artists. His scam went unnoticed until a few months ago. In other words, he had been gaming the system for at least seven years without raising alarm bells.
The plan. According to Christie M. Curtis, head of the FBI’s New York office, Smith used automated functions to repeatedly stream music and generate illegal royalties. Before that, the man allegedly orchestrated the scheme to bypass the platforms’ fraud detection systems. Prosecutors allege that initially in 2017, he engaged in fraudulent streaming of music he owned, but the streaming platforms could detect potential fraud if a particular piece of music was streamed a billion times.
Upon learning of this, Smith reportedly modified the plan. The following year, he moved to generate as much music as possible, according to the indictment. “We need to get a TON of songs fast to make this work around the anti-fraud policies these guys are all using now,” the defendant said in private messages sent to two friends, the indictment revealed.
Accusations. The groundbreaking fraud case doesn’t only focus on Smith. The authorities are also investigating the CEO of an artificial intelligence music company, with whom Smith started the plan in 2018, as well as a music promoter who helped create hundreds of thousands of songs. It’s also been revealed that Smith allegedly bought numerous email addresses to set up fake accounts and used a VPN service to hide the fact that he controlled them from his home.
The case took a major turn when Smith denied involvement in streaming fraud when questioned by the Mechanical Licensing Collective (MCL). Shortly after that, the MLC became suspicious of the large volume of music being generated so quickly without the use of AI.
A warning to others. There’s still a long way to go before the music industry aligns with AI tools in this digital era. Smith’s case may be a sign of the times, but it likely won’t be the only one.
Smith faces charges in New York for money laundering, wire fraud, and conspiracy to commit wire fraud. According to the MLC, the case “shines a light on the serious problem of streaming fraud for the music industry.”
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