Microsoft 365 Security and Compliance Configuration Guide

Overview

Microsoft 365 is the backbone of most enterprise productivity environments — and a prime target for attackers. This guide covers the essential security and compliance configurations every M365 tenant should implement, from identity protection to data loss prevention.

Who Should Use This Guide:

M365 administrators configuring tenant security
Security engineers implementing compliance controls
MSP technicians hardening client tenants
IT managers preparing for compliance audits

What You Will Learn:

Area	Configuration
Identity	MFA enforcement, conditional access, PIM
Email	Anti-phishing, safe links, safe attachments
Data Protection	DLP policies, sensitivity labels, retention
Audit & Monitoring	Unified audit log, alert policies
Compliance	eDiscovery, compliance score, assessments

Requirements

Component	Minimum License
Conditional Access	Entra ID P1 (included in M365 E3)
PIM	Entra ID P2 (included in M365 E5)
Defender for Office 365	Plan 1 (E3) or Plan 2 (E5)
DLP	M365 E3+
Sensitivity Labels	M365 E3+
Advanced Audit	M365 E5

Part 1: Identity Security

Enable Security Defaults (Minimum Baseline)

For tenants without Entra ID P1:

# Connect to Microsoft Graph
Connect-MgGraph -Scopes "Policy.ReadWrite.ConditionalAccess"
 
# Check current security defaults status
Get-MgPolicyIdentitySecurityDefaultEnforcementPolicy
 
# Enable security defaults (if no conditional access policies exist)
Update-MgPolicyIdentitySecurityDefaultEnforcementPolicy -IsEnabled $true

Conditional Access Policies (Recommended Over Security Defaults)

Policy 1: Require MFA for All Users

Setting	Value
Users	All users
Exclude	Break-glass emergency accounts
Cloud Apps	All cloud apps
Grant	Require authentication strength — Phishing-resistant MFA

Policy 2: Block Legacy Authentication

Setting	Value
Users	All users
Cloud Apps	All cloud apps
Conditions > Client apps	Exchange ActiveSync, Other clients
Grant	Block access

Policy 3: Require Compliant Devices

Setting	Value
Users	All users
Cloud Apps	Office 365
Conditions > Device platforms	Windows, macOS, iOS, Android
Grant	Require device to be marked as compliant

Policy 4: Block Access from Risky Sign-ins

Setting	Value
Users	All users
Conditions > Sign-in risk	High
Grant	Block access

Break-Glass Emergency Accounts

Always maintain at least two emergency access accounts:

# Create break-glass account (do this in Entra admin center)
# - Use a non-personal, organization-owned email
# - Exclude from ALL conditional access policies
# - Use a very long, complex password stored in a physical safe
# - Do NOT enable MFA on these accounts
# - Monitor sign-in activity with alerts
 
# Create alert for break-glass account usage
# In Microsoft 365 Defender > Alert policies
# Alert when: "Activity by break-glass account"

Part 2: Email Security (Defender for Office 365)

Anti-Phishing Policy

# Connect to Exchange Online
Connect-ExchangeOnline
 
# Create strict anti-phishing policy
New-AntiPhishPolicy -Name "Strict Anti-Phishing" `
    -Enabled $true `
    -EnableMailboxIntelligenceProtection $true `
    -EnableOrganizationDomainsProtection $true `
    -EnableSpoofIntelligence $true `
    -EnableFirstContactSafetyTips $true `
    -EnableSimilarUsersSafetyTips $true `
    -EnableUnauthenticatedSender $true `
    -PhishThresholdLevel 3 `
    -TargetedUserProtectionAction Quarantine `
    -TargetedDomainProtectionAction Quarantine `
    -MailboxIntelligenceProtectionAction Quarantine
 
# Apply to all users
New-AntiPhishRule -Name "Strict Anti-Phishing Rule" `
    -AntiPhishPolicy "Strict Anti-Phishing" `
    -RecipientDomainIs (Get-AcceptedDomain).DomainName

Safe Links Policy

New-SafeLinksPolicy -Name "Strict Safe Links" `
    -EnableSafeLinksForEmail $true `
    -EnableSafeLinksForTeams $true `
    -EnableSafeLinksForOffice $true `
    -TrackClicks $true `
    -ScanUrls $true `
    -EnableForInternalSenders $true `
    -DeliverMessageAfterScan $true `
    -DisableUrlRewrite $false
 
New-SafeLinksRule -Name "Strict Safe Links Rule" `
    -SafeLinksPolicy "Strict Safe Links" `
    -RecipientDomainIs (Get-AcceptedDomain).DomainName

Safe Attachments Policy

New-SafeAttachmentPolicy -Name "Strict Safe Attachments" `
    -Enable $true `
    -Action Block `
    -ActionOnError $true `
    -EnableRedirect $true `
    -RedirectAddress "security@example.com"
 
New-SafeAttachmentRule -Name "Strict Safe Attachments Rule" `
    -SafeAttachmentPolicy "Strict Safe Attachments" `
    -RecipientDomainIs (Get-AcceptedDomain).DomainName

Email Authentication (SPF, DKIM, DMARC)

Record	Configuration
SPF	`v=spf1 include:spf.protection.outlook.com -all`
DKIM	Enable in Defender portal for each domain
DMARC	`v=DMARC1; p=reject; rua=mailto:dmarc@example.com; pct=100`

Part 3: Data Loss Prevention (DLP)

Create DLP Policy for Sensitive Data

# Connect to Security & Compliance
Connect-IPPSSession
 
# Create DLP policy for credit card numbers
New-DlpCompliancePolicy -Name "Protect Financial Data" `
    -ExchangeLocation All `
    -SharePointLocation All `
    -OneDriveLocation All `
    -TeamsLocation All `
    -Mode Enable
 
New-DlpComplianceRule -Name "Block Credit Card Sharing" `
    -Policy "Protect Financial Data" `
    -ContentContainsSensitiveInformation @{
        Name = "Credit Card Number"
        MinCount = 1
        MaxConfidence = 100
        MinConfidence = 75
    } `
    -BlockAccess $true `
    -NotifyUser "SiteAdmin" `
    -GenerateIncidentReport "SiteAdmin"

Recommended DLP Templates

Template	What It Protects
Financial data	Credit cards, bank account numbers
PII	SSNs, passport numbers, driver's licenses
Healthcare (HIPAA)	Medical record numbers, health data
PCI DSS	Payment card industry data
GDPR	EU personal data

Part 4: Audit Logging and Monitoring

Enable Unified Audit Log

# Check if audit logging is enabled
Get-AdminAuditLogConfig | Select-Object UnifiedAuditLogIngestionEnabled
 
# Enable unified audit logging
Set-AdminAuditLogConfig -UnifiedAuditLogIngestionEnabled $true

Enable Mailbox Auditing

# Enable mailbox auditing for all mailboxes
Get-Mailbox -ResultSize Unlimited |
    Set-Mailbox -AuditEnabled $true -AuditLogAgeLimit 365
 
# Verify
Get-Mailbox -ResultSize Unlimited |
    Select-Object DisplayName, AuditEnabled |
    Where-Object { -not $_.AuditEnabled }

Critical Alert Policies

Configure these in Microsoft 365 Defender:

Alert	What It Monitors
Suspicious email forwarding	Auto-forwarding rules to external domains
Elevation of privilege	Admin role assignments
Malware campaign	Multiple users receiving same malware
Unusual external user file activity	External sharing anomalies
eDiscovery search started	Compliance search initiated
Mass file deletion	Bulk SharePoint/OneDrive deletions

Part 5: Additional Hardening

Disable External Forwarding

# Block automatic external forwarding
Set-TransportRule -Name "Block External Auto-Forwarding" `
    -FromScope InOrganization `
    -MessageTypeMatches AutoForward `
    -SentToScope NotInOrganization `
    -RejectMessageReasonText "External email forwarding is blocked by policy" `
    -RejectMessageEnhancedStatusCode "5.7.1"

SharePoint and OneDrive Security

# Connect to SharePoint Online
Connect-SPOService -Url "https://contoso-admin.sharepoint.com"
 
# Restrict external sharing
Set-SPOTenant -SharingCapability ExternalUserSharingOnly
 
# Block downloads from unmanaged devices
Set-SPOTenant -ConditionalAccessPolicy AllowLimitedAccess
 
# Require MFA for sharing
Set-SPOTenant -RequireAcceptingAccountMatchInvitedAccount $true

Teams Security

Setting	Recommended Value
External access	Allow only specific domains
Guest access	Enabled with restrictions
Meeting policies	Lobby for external participants
Messaging policies	Report security concerns enabled
App permissions	Admin-approved apps only

Compliance Score Checklist

Track your progress in Microsoft Compliance Manager:

MFA enabled for all users
Legacy authentication blocked
Anti-phishing policies configured
Safe Links and Safe Attachments enabled
SPF, DKIM, DMARC configured
DLP policies active for sensitive data
Unified audit logging enabled
Mailbox auditing enabled
External forwarding blocked
SharePoint external sharing restricted
Alert policies configured
Break-glass accounts created and monitored
Conditional access policies deployed
Sensitivity labels published