Google has gone on record time and time again that link schemes with the intent of manipulating Google's search results is against their terms of service and will thus take action against web sites both algorithmically and manually.
I figured we'd post about it one more time, because Googler Wysz made a nice comment on why those penalties might not always be so clear. He made the comment in a Google Webmaster Help thread being used to out link schemers. He said:
Thanks for the reports of these link schemes. We have someone from the spam team looking into this. You can continue to report more via our spam report form in Webmaster Tools.
We're already aware and have taken action on some of the sites mentioned, so now's a good time to point out that even if we have taken action on a site to address bad linking, it doesn't always mean that you'll see the results of it in such an obvious way like a site being completely obliterated from the index and not showing up for site: queries. That being said, we can take pretty strong steps to preserve the quality of our results, and link schemes are one of the toughest violations for a webmaster to recover from.
Got that? Even when they do take action, it might not be that they completely drop the site form the index. But Google did say the action they do take is "pretty strong" in order to "preserve the quality of our [Google] results."
He goes on to explain that once a site is penalized there are ways to repent. He explained:
Step 1: Fix the problem. Get rid of bad links on your own site, and get rid of bad links pointing to your site.
Step 2: File for reconsideration. Note that this happens after step 1. ;-) If there are some things you have tried to but can't fix (such as links to your site on pages you don't own), document them in your request.
Oh, and if you are one of those that report paid links, then it might be a good thread for you to check out and post in.
Forum discussion at Google Webmaster Help.