Royal Mail is facing a record £11.4m fine for failing to adequately prevent mail being lost, damaged or stolen.
Royal Mail has 28 days to appeal against the fine
Regulator Postcomm said Royal Mail was guilty of "serious breaches" of its licence in relation to mail security measures and staff vetting.
Postcomm launched an investigation in 2004 after media reports claimed that some staff were tampering with mail.
Royal Mail said it would appeal against the fine - the largest ever proposed by the regulator - calling it "unfair".
Royal Mail could also be fined £270,000 for poor delivery performance in London during 2004-5.
Royal Mail has admitted that more than 14 million letters and parcels were lost, stolen, damaged or tampered with last year.
However, it insists that its service is one of the safest in the world.
About 14.6 million letters were lost, damaged or stolen last year
An estimated 99.9% of posted mail arrived safely
0.006% of posted mail was stolen
An estimated 200,000 items were stolen by Royal Mail staff
Royal Mail caught and prosecuted 394 staff for criminal activities
In its investigation, Postcomm found that many Royal Mail agency staff were not properly vetted before being employed and that this had compromised the safety of deliveries.
It also concluded that co-ordination of measures to prevent theft and damage were "ineffective" and that Royal Mail had failed to adequately monitor the effectiveness of its own procedures.
"Customers are entitled to expect that when they post mail it will reach its destination," said Nigel Stapleton, Postcomm's chairman.
"A Postcomm review uncovered serious shortcomings in Royal Mail's application of its procedures for properly protecting the mail."
Postcomm said Royal Mail had made significant efforts to tackle the problem over the past nine months.
However, it said the proposed fine of £11.3m reflected the "extent and seriousness" of the identified shortcomings, most of which could be put down to "management failings".
Royal Mail said the fine was "unreasonable", stressing that it had significantly tightened up its security procedures since 2004.
The amount of lost mail had halved over the last three years, it said, while stolen mail accounted for just 0.001% of the 22 billion items handled every year.
It also stressed that the money spent on paying the fine could be better used to improve customer service.
"Clearly we have substantially improved," chief executive Adam Crozier told the BBC.
"But clearly it is very important we continue to improve our service. We are aware of that."
But consumer watchdog Postwatch said it supported the fine, arguing that Royal Mail had "let its customers down".
"Tough action is necessary and it would have played to Royal Mail's complacency not to impose a penalty," said Postwatch chairman Millie Banerjee.
"The fact is, letters are still being lost daily; some are stolen, many are misdelivered."
Under legislation passed in 2000, Postcomm has the right to fine Royal Mail up to 10% of its annual turnover if it is found to have breached its licence obligations.
Royal Mail was fined £7.5m in 2003 - the largest fine levied to date - after it was found to have missed performance standards for delivering business mail.