The New York Times has an interesting article about white hat and some not so white hat SEO techniques The Dirty Little Secrets of Search
The NY Times article mentions that Matt Cutts had following to say when asked what Google was going to do about Paid Back Links issue:
Matt Cutts noted, too, that before The Times presented evidence of the paid links to JCPenney.com, Google had just begun to roll out an algorithm change that had a negative effect on Penney’s search results. (The tweak affected “how we trust links,” Mr. Cutts said, declining to elaborate.)
Interesting and somewhat troubling part of the article is, however, when they mention that thousands of links were placed on abandoned low quality websites. Had these types of links were simply discounted or ignored, there would not have been anything to worry about, and secondly and more frighteningly, how easily Google was hoodwinked and its search rankings manipulated. The algorithms should have detected the linking patterns of this size and magnitude!
And that’s not all; Matt Cutts also said:
Google had detected previous guidelines violations related to JCPenney.com on three occasions, most recently last November. Each time, steps were taken that reduced Penney’s search results.
If they already had flagged them thrice, why did not they bother to put JCPenny under some sort of “watch”?
Since they had to intervene manually to bring down JCP in SERPs is evidence enough that Google still has to go a long way detecting and discounting link juice from these paid links.