The truce on 11 July 1921 stopped the war between the IRA and the British state, but it neither ended the violence in Ireland, nor resolved the political fate of the country. It was followed by five months of prevarication, manœuvring, high tension and frustration, as the British government negotiated a peace settlement with Sinn Féin leaders, first through correspondence, and then, from 11 October, in conference in London. Eventually, after a Lloyd-George ultimatum and some anxious brinkmanship, an Anglo-Irish Treaty was signed on 5 December 1921, which granted southern Ireland Dominion status. The settlement split the Sinn Féin and IRA organisations. The moderates formed a government, set about raising a National Army and worked with London to implement the treaty. A significant republican minority condemned the treaty as a betrayal, and seized control of parts of the country. This confrontation, and the security vacuum it created, led to escalating political and criminal violence throughout the twenty-six counties in the first half of 1922. Open civil war finally broke out on 28 June 1922, and continued for the next eleven months. More Irish people died during the Civil War than during the War of Independence; the RIC, DMP and British army also suffered casualties, despite the continuance of the truce. Moreover, on a number of occasions it seemed to London as if the moderate faction in Sinn Féin might lose control or throw their lot in with the extremists, which would force Britain to launch a full reconquest of southern Ireland. The Anglo-Irish settlement remained fragile: as General Macready later recalled in his memoirs, ‘there were moments when the reoccupation of the island seemed to hang on a thread.’

Southern Ireland's violent transition from rebellious province to independent state was a uniquely confusing period for the British government and its intelligence system. The British security apparatus, slowly built up during the previous two years, was first suspended and then dismantled: there were soon no British representatives across much of the twenty-six counties. The new Sinn Féin administration was neither willing to share intelligence openly, nor trusted by British officials. At the same time, London was bombarded by rumours and warnings from unofficial sources, especially from loyalist Irish residents threatened by the new political regime.