Knowing your wife’s kindness, sense of justice and levelheadedness, it’s hard to imagine her sister being so diametrically opposed on those fronts.
I’ve been in a similar position of your daughter for most of my youth. My parents put up with so.much.manipulative.BS from my mom's side of the family. When I was young they were able to hide it from us, but her whole “crying in the car plus stress induced migraine” wasn’t possible to hide anymore when I was a teenager. It did not take me long to reach the conclusion that some family relations are simply untenable; it took my mom a long time to get to that point and cut ties. It’s now been a decade and she’s still glad she did it. There’s never been even the slightest attempt at self reflection or a hint of an apology from the other side, which says enough I think.