The problem here is that there is no machine-readable disclosure for paid links. Matt suggests that there a “ton” of ways, but none of these ways mean “this link is paid”

Nofollow, in particular, does not mean “this link is paid.” What Google is really asking webmasters to do is “filter the paid links for us.”

Given that Google’s remedy for sites that fail to do this for them is to remove that site’s ability to “recommend” another site by passing PageRank and link reputation, those selling advertising should at least consider going along with nofollow.

It’s ludicrous to attempt to the “machine readable disclosure” expectation to buyers of advertising. Even threatening to penalize advertisers for legally purchasing advertising strikes me as more than a little bit likely to result in legal problems for Google.

At least in the USA, it seems clear enough that the law requires human-readable disclosure of paid links. That’s something a lot of sites need to catch up to, but search engines need to get smarter about automated discovery instead of relying on pressure tactics.