Microsoft Expands Copilot DLP Controls to All Storage Locations

Microsoft is expanding data loss prevention (DLP) controls to block the Microsoft 365 Copilot AI assistant from processing confidential Word, Excel, and PowerPoint documents, regardless of their location. The change addresses a critical gap in protection that previously left local files vulnerable while cloud-stored documents remained safeguarded.

Currently, Microsoft Purview DLP policies apply only to files stored in SharePoint or OneDrive, but not to those stored on local devices. This limitation meant that sensitive documents saved on laptops or desktops could potentially be accessed by Copilot, creating a security blind spot for organizations relying on Microsoft's AI assistant.

The update will be deployed through the Augmentation Loop (AugLoop) Office component between late March and late April 2026. This phased rollout ensures that DLP controls apply uniformly to all Office documents, whether they are stored locally, in SharePoint, or OneDrive.

Addressing Customer Feedback and Security Gaps

"This enhancement responds to customer feedback requesting more consistent protection coverage across local and cloud-based file locations," Microsoft said in a message center update. The change directly addresses concerns from enterprise customers who needed comprehensive protection for sensitive documents regardless of where they're stored.

Once deployed, Copilot will not be able to read or process Word, Excel, or PowerPoint documents that are labeled as restricted by DLP controls. This includes files with sensitivity labels applied through Microsoft's information protection framework, ensuring that confidential business data remains protected from AI processing.

Technical Implementation Details

Microsoft has engineered the solution to work seamlessly without requiring administrative intervention. "Microsoft also stated that the changes will be automatically enabled for organizations with DLP policies configured to block Copilot from processing sensitivity-labeled content, without requiring any administrative action or changes," the announcement notes.

The technical approach involves enhancing Office clients and AugLoop to read a file's sensitivity label directly from the client rather than relying on Microsoft Graph calls. "Today, AugLoop retrieves the label by calling Microsoft Graph using the file's SharePoint or OneDrive URL, which limits DLP enforcement to files stored in OneDrive and SharePoint. By enabling the client to provide the label, DLP enforcement now applies uniformly across all storage locations, including local files."

This architectural change represents a significant improvement in how Microsoft's AI assistant interacts with protected content, moving from a cloud-centric model to a comprehensive protection framework that covers all file storage scenarios.

Context: Recent Security Incident

This expansion comes on the heels of a software bug that allowed Microsoft 365 Copilot Chat to read and summarize confidential emails in users' Sent Items and Drafts folders for nearly a month despite the emails being protected by active data loss prevention policies and labeled as confidential.

The bug, first discovered on January 21, affected the Copilot "work tab" chat functionality, which mistakenly accessed and summarized emails stored in users' Sent Items and Drafts folders, including those labeled confidential and intended to be protected from automated tools by explicit confidentiality labels.

Microsoft characterized the issue as a "code issue" that provided access to summarized information only to those who were already authorized to see it. However, the company acknowledged that "the behavior did not meet our intended Copilot experience, which is designed to exclude protected content from Copilot access."

This incident highlighted the importance of comprehensive DLP controls and likely accelerated Microsoft's timeline for expanding protection to local files. The company has been working to restore confidence in Copilot's security capabilities while addressing the technical shortcomings that led to the unauthorized access.

Impact on Organizations

The expanded DLP controls will benefit organizations across multiple sectors, particularly those handling sensitive information such as healthcare providers, financial institutions, government agencies, and enterprises with intellectual property concerns.

For IT administrators, the automatic deployment means no additional configuration is required for organizations that already have DLP policies in place. However, organizations without existing DLP policies may want to review their information protection strategies to take full advantage of the enhanced Copilot security features.

Microsoft's approach of extending existing DLP policies rather than creating new controls for Copilot simplifies the management burden while ensuring consistent protection across all Microsoft 365 services and applications.

Broader Security Implications

The move reflects a growing trend in enterprise software where AI assistants must be carefully constrained to prevent unauthorized access to sensitive information. As AI tools become more integrated into workplace productivity suites, the potential attack surface for data breaches expands, making comprehensive DLP controls increasingly critical.

Microsoft's decision to extend protection to local files also acknowledges the reality of modern work environments where employees frequently work with documents both online and offline. The hybrid nature of contemporary work requires security solutions that can protect data regardless of its storage location or network connectivity status.

Timeline and Availability

The deployment window of late March to late April 2026 provides organizations with advance notice to prepare for the change. During this period, Microsoft will roll out the AugLoop enhancements across its customer base, with the update being applied automatically to eligible tenants.

Organizations can verify their DLP policy configuration and ensure that sensitivity labels are properly applied to confidential documents to maximize the protection offered by the expanded Copilot controls. Microsoft recommends reviewing existing DLP policies to confirm they align with organizational security requirements.

This enhancement represents Microsoft's ongoing commitment to securing its AI-powered productivity tools while responding to customer feedback and addressing security vulnerabilities. As AI assistants become more prevalent in enterprise environments, such comprehensive protection measures will likely become standard requirements for organizations handling sensitive data.