From Google: "Google uses a number of methods to detect paid links, including algorithmic techniques. We also welcome information from our users. If you know of a site that buys or sells links, please tell us by filling out the fields below. We'll investigate your submissions, and we'll use your data to improve our algorithmic detection of paid links."
This of course opens a pandora's box of problems least of which is how do they know paid from non and what's to stop abuse of this?
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Google Report PageRank Cheater