This solution meets the requirement of encrypting each customer’s data separately with the least operational overhead by leveraging AWS Key Management Service (KMS).

Separate AWS KMS Keys: By creating separate KMS keys for each customer, you can ensure that each customer’s data is encrypted with a unique key. This approach satisfies the compliance requirement for separate encryption and provides fine-grained control over access to the keys.

Granular Access Control: AWS KMS allows you to define key policies and use IAM policies to grant specific permissions to the keys. This ensures that only authorized users or services can access the keys, thereby maintaining the principle of least privilege.

Logging and Monitoring: AWS KMS integrates with AWS CloudTrail, which logs all key usage and management activities. This provides an audit trail that is essential for meeting compliance requirements.

Why Not Other Options?:

Option A (Store keys in S3): Storing keys in S3 is not recommended because it does not provide the same level of security, access control, or integration with AWS services as KMS does.

Option B (Hardware security appliance): Deploying a hardware security appliance adds significant operational overhead and complexity, which is unnecessary given that KMS already provides a secure and centralized key management solution.

Option C (Single KMS key for all data): Using a single KMS key does not meet the requirement of encrypting each customer's data separately.

AWS References:

AWS Key Management Service (KMS)- Overview of KMS, its features, and best practices for key management.

Using AWS KMS for Multi-Tenant Applications- Guidance on how to design applications using KMS for multi-tenancy.