You can get banned for doing something like that as it's against their TOS, in reality this very rarely happens and will only happen if there are multiple complaints about it or your doing other shifty stuff.
Guess a lot has changed since I read the AdSense ToS all those years ago. It used to just say about not placing them by/under pictures to make it look like a link for the picture and not iframing/cropping them to remove the "ads by Google" thing.
The ads in the menu bars are fine. They are distinguishable because of the "Ads by Google". There is nothing misleading and nothing hiding the ads or the "Ads by Google" title. I bet he/she gets a killer ctr for the main ad at the top beside the image/logo.
I think its a great idea actually... If I wasn't paying attention, I would probably click on it...
It may or may not be against their TOS, but as far as I know, since the title still says Ads for Google vs. his categories headers, he probably has had reviews, but passed them...
That guy has a great placement and i don't think it violates any rules. If fact i think it's a perfect example of a site "on the edge".
I mean my first websites are a lot worse and i had no problems ( i went though a review and i was told only to remove the links that were on top of the footer links ( they were identical in every aspect except the "ads by google" part).
I think it tiptoes the line. However I make a lot of my money off adsense and can't afford to take chances, so I general will use horizontal lines or small text that says "sponsored links below". Probably cost me a few clicks but I want to be safe.
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