Posting this again as it is still unresolved.
I have a Small Business Server 2003 SP2 and Exchange has SP2. Every email sent from Outlook 2000 results in the following NDR within a second or two from clicking send.
The recipient could not be processed because it would violate the security policy in force
<myserver.local #5.7.0 smtp;530 5.7.0 Authentication required>
Same result for OWA.
Same result with or without a Smart Host.
No changes to to Exchange in months. I am told the domain hosting company did make some unknown change about the same time this problem began. I do not understand how this could be a factor because the bounce happens to fast for it to come from the hosting companies server.