Matt Cutts wrote a blog post yesterday about how Google is noticing reciprocal link exchange requests and how the sender of the particular email tried to circumvent Google's "filters" by including a request for a link exchange within in image (so that Google couldn't "read" it). Since people are quick to report such infractions to Google, they know about it.
On that note, how do you compete with those who buy links in bulk? WebmasterWorld members attempt to tackle this question. Some typically avoid taking upon clients who are working in competitive industries unless there is money to be spent. Others look for relevant link exchange options (provided that the webmaster who is asked to give a link actually is receptive to providing the link).