Does Google Reward Bad Links in Some Industries?
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First of all, OSE and other link crawlers provide an incomplete picture of a site's backlinks because no site has the resources that Google does. So OSE could be missing some high quality backlinks, although it's unlikely. You could try comparing data sets with other crawlers such as MajesticSEO and AHREFS.
As far as low quality links helping rankings, yes, black hat and grey hat tactics still work. Many tactics are more difficult to pull off thanks to updates like Penguin, and black hat sites tend to get burned once Google catches onto them, but they can definitely work in the short term.
I would caution against copying low quality links from a competitor, because they can burn you in the long run. Only expose your client to as much risk as they are willing to take on. You should be able to outrank them using other methods.
Here is a great list: http://pointblankseo.com/link-building-strategies
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Great answer as usual Takeshi.
The only thing I might add, is you should also evaluate the industry leaders. If they are using grey / black hat tricks then you maybe in an industry that needs a real seo leader. Recently I have seen this problem with certain industries like payday loans. There maybe an opportunity here for somebody with strong seo skills and white hat knowledge backed by solid content and great developers to produce a site that crushes it. Thus causing the industry to follow suit and clean up its act, when that happens those using black / grey hat ticks will be decimated.
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I'm in real estate. I've seen sites get to No1 (and stay there) with some of the spammiest link profiles imaginable -- low-rent directories, blog comments, paid links from obvious link-brokers, you name it. It's frustrating, to say the least.
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I agree that it's worth the long-term investment, but we've actually seen that some sites, that fairly recently have dumped a ton of effort into link spam, suddenly surge in the rankings. Needless to say, our clients begin to doubt our white-hat strategies!
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We're not planning on mimicking these strategies at all, it's just difficult to explain to a client why their competitors, with terrible sites and spammy link profiles, are at the top of the SERPs. And, as I mention below, many of these sites have risen to the top after Penguin with no apparent redeeming qualities. We'll keep doing what we do and keep our fingers crossed that white-hat SEO really will prevail!
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Yeah, Google isn't perfect, it doesn't always detect all the spam sites. And spam can rank well for YEARS before Google catches onto it, that's what it was like before Panda & Penguin rolled out. But if it's a keyword that gets a lot of searches, Google will eventually figure it out.
One strategy that can work is to use grey hat tactics to get good rankings in Google, and then leverage that ranking position & traffic to get higher quality links. This can help cement your rankings so that once the low value links get devalued, you still rank well because of all the quality links you acquired afterwards.
Another tactic is to build an intermediary layer between the spam links and your main site. This way, even if the sites you link to get penalized, you have a buffer site insulating your main one. You can also create multiple layers of buffers to reduce your risk of being penalized.
Anyway, these are all things I would never do with a client site, but you should give it a try if you want to learn more about greyhat/blackhat tactics

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Just point them to all the business owners posting horror stories about Penguin, how their rankings have dropped and their businesses are dying, how they are now paying money to remove links that they originally paid to build, the long wait for reconsideration requests while their profits are shrinking...
It's a long term vs short term strategy. If your clients want black hat links, make sure they understand the risks, and get it in writing in case the sh*t hits the fan

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Your response is, strictly speaking, the right one.
But I've seen people in my industry "black hat" their way to the top spots and stay there for years.
It's difficult telling people to play it by the book when lower rankings equal lower revenue equals people's livelihoods at stake. Just my two pennies' worth.
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That's definitely true, and then there all those people who got their livelihoods destroyed by Panda & Penguin because of the shady techniques that were working for "years". It's up to each individual to make whatever choice they want, so long as they understand the risks.
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This is my opinion too. There was a time when this was acceptable and essentially their black hat methods have been grandfathered into the system. However if you tried to it in the present you would be held back. I have a competitor that was hit on long tail terms but still ranks for the most competitive phrases. Needless to say he upped his PPC in order to make up for frivolous phrases but his traffic is still besting me because he has the most obvious search phrases at number one.