To detect paid link building activities, you first need to analyze the link sources. Use comprehensive tools like SEOmoz Linkscape and Majestic SEO, to extract the information about your competitor’s back-link generating sources. Once you have this gained this knowledge, you can begin analyzing the links using the following methods:

1. Look for Coupons and Farms:
If you find a majority of your competitor’s back-links coming from link farms or coupon sites, then there is definitely something fishy going on in their SEO campaign. Be sure to monitor these links closely and look for new sources that provide back-links to your competitor’s site.
2. Track Blog Spamming:
If you notice that you competitor has suddenly received a lot of back-links from a number of blogs, then they might be paid blog posts. Do some research on the blogs and see if they paid offer exchange programs to other websites.
3. Detect Professionalism:
It is quite possible that your competitor has hired a professional SEO firm to do all the link building. It’s time you learn how to track this particular craft. If links are coming from hundreds of directories or you find a pattern of deep-links coming from article sites and press releases, you have discovered that your competitor has hired a firm to do all the link-building.

Google’s quality guidelines say: “Make sites for users, not for search engines.” If you find any site that is involved in diluting search result quality by employing techniques like paid linking for getting a high page rank, Google would appreciate your reporting that website immediately.