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.
This is due to the simple fact that martial arts are completely unregulated in this country (as they should be). As I've said before, there simply is not a universal standard for rank or title that is used by every single organization of every single art. That's largely why I am against any type of government regulation of martial arts, because the people writing the regulations would have experiences limited to their particular art and then try to force the rest of us to conform when historically martial artists were notorious for breaking the mold and going their own way. After all, every "traditional" system was at one point new and revolutionary. They did what no one else was doing, and they stood the test of time.
Couple the fact that there is no standardization with the public being generally ignorant of our traditions and customs, and you get the perfect environment for diploma mills. The average person has no idea what to look for in a martial arts school. Because of that, I'm not even sure why diploma mills exist considering no one outside of the martial arts cares about your rank, as evidenced by the question I get asked the most by potential students (and often the only question) is "how much are your classes?" It's very rare I get asked what our classes are like, and I have literally never been asked what style we teach or what my rank is.
I think that last part is important. As martial artists, we tend to focus too heavily on things that have no meaning in the real world. Certifications are only as valuable as the respect you have for the person signing it, and outside of very limited contexts they are absolutely meaningless. What truly matters is what we are doing for our community. Are we teaching our students the highest quality of martial arts to the best of our abilities? Are we honest about what we're teaching, whether it's for self defense, sport or health/fitness? People who spend their time bickering over whose piece of paper that they probably can't even read means the most often leave little time for the things that are truly important, but as Royce Gracie once said, "A black belt only covers two inches of your ass. You need to cover the rest."