Click on "Settings", "Privacy Settings", "News Feed and Wall", and then "Facebook Ads" tab.
"Facebook occasionally pairs advertisements with relevant social actions from a user's friends to create Facebook Ads. Facebook Ads make advertisements more interesting and more tailored to you and your friends. These respect all privacy rules. You may opt out of appearing in your friends' Facebook Ads below."
Thanks to Fr. Roderick for pointing this out.
Related: Facebook Blog - Debunking Rumors about Advertising and Photos
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