yes call the police and sorry if this sounds harsh it should of been the first ting your SIL did, i understand the fact shes neighbours but still if he does slot of babysitting then keeping him away from her own children isnt enough the next lot he babysits may not get away, this man is obviously a peaodaphile (sp?) and needs reporting, mothers with children have a right to know, I would be livid if I knew someone knew someone was a potential threat and did nothing.
I hope your SIL and her boys are ok i really do feel for her and the boys but the police must be called