My understanding is that recognition is not an exact science, but more based upon visions, prophecies, astrology, and even chance encounters.
There are some great resources and films done in the west on this phenomenon, and it seems that the most common way of recognizing is by omens. A delegation of seekers might go out and try to find a child born about the same time, or who displays a certain number of defined characteristics. If a child is identified as a candidate, a classic well known test is to present them with a selection of items, the hope being that they will recognize the personal artifacts of the dead teacher. If they pass whatever tests presented then, I believe, they are enthroned and declared the reincarnation.
If you can find it, Tulku: Divine Birth, Normal Life... is an interesting Doco by a young Tibetan guy (Gesar Mukpo) from California who was recognized as a Tulku. [youtube]9D0X-n-eNGU[/youtube]
TULKU "Divine birth, ordinary life" - official trailer - YouTube
Little Buddha starring Keanu Reeves and directed by Bernardo Bertolucci, follows the story of a Bhutanese monk trying to find the reincarnation of his master in America. It's very fictionalized, but atleast gives you an idea.
Little Buddha on Vimeo
Quite recently there have been many Westerners recognized or suggested to be Rinpoches and Tulkus, most famously Steven Seagal, who was recognized as Chundrag Dorje a terton of the Nyingma lineage. There's also Jetsunma, who was the first western woman to be recognized as a Tulku in 1988. And a few others.