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A federal agent said WhatsApp's encryption is a lie. Then the investigation was shut down
(www.techspot.com)
This is a most excellent place for technology news and articles.
It's likely the cloud backups they can read. Encrypted archives are hard to sync across devices while still keeping the same level of security. I always advise against it if you don't have a good reason to do it.
It's also all but confirmed that they use on-device keyword recognition for targeted advertising. So if the app can phone home for some keywords, then it can phone home for anything.