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I think you and your wife absolutely did the right thing telling the mother. Your wife was looking out for her sister, and you're right, you don't lie to or mislead family about serious shit like this. Consequences will surely come sooner or later for behavior like this. Sounds like this little girl isn't going to stop until she is behind bars for something.
You are not an immediate family member, and unless someone is in immediate physical danger, I wouldn't go over your wife's head on anything that has to do with her immediate family. You can't win, and you are then possibly at odds with your spouse -- bad for you.
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less I say, smarter I am
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