You are running some kind of proxy in front of it.

No proxy. Just sendmail with users using emacs/Rmail or Webmail/Squirrelmail.
 
If you want it to show real client IP, you need to enable forwarding of said data. With dovecot it's done by setting

login_trusted_networks = your-upstream-host-or-net

in backend config file.

OK I changed it and restarted wforce and dovecot. Still seeing this:
Apr 12 14:38:55 auth: Debug: policy(ouruser,127.0.0.1,<6GFTnVmGcMN/AAAB>): Policy server request JSON: {"device_id":"","login":" ouruser","protocol":"imap","pwhash":"43","remote":"127.0.0.1","success":false,"policy_reject":false,"tls":false}
 
For webmails, this requires both login_trusted_networks and also support from the webmail software to forward client IP.

I did get a reply from the Squirrelmail list:
"Well, I've had code sitting around for a while that implements RFC2971 (ID command), so I just committed it.  You can use it for this purpose by putting something like this into your config/config_local.php
$imap_id_command_args = array('remote-host' => '###REMOTE ADDRESS###');"

Which I also added previously. But that doesn't address emacs/RMail users.

Could there be a setting in sendmail.mc/cf file that I'm missing?