Unfortunately, like the term "fraud," the concept of a diploma mill gets thrown around the martial arts community so often that it has lost all meaning. It is most often used to describe a school or organization that doesn't live up to the standards of the accuser. What the accuser doesn't take into account is that quality is subjective, and there are absolutely different levels to this. A degree from Harvard is worth more than one from your local community college. Both are still valid.
In contrast, a diploma or rank mill merely sells rank with bare minimum requirements (often simply a successful payment). They offer meaningless pieces of paper in exchange for a fee without any consideration. While I will admit there are plenty of schools who issue ranks merely based on attendance, I still wouldn't call them diploma mills. Just because they do not live up to my standards does not mean they are fake or fraudulent. Everyone's training goals are different, and we need to take that into account when judging others. Where it becomes a problem is when the issuing authority, whether that's the instructor or an organization, is dishonest about what is being offered such as saying you teach self defense but it's really cardio kickboxing, or an organization recognizing a rank/title you already hold but you present it as the source of your credentials. An organization acknowledging and recognizing something that has already been legitimately earned is not the same as an organization selling you a piece of paper no questions asked.