Major, I feel your pain. And yet, I feel like I can one-up your pain. Or at least try.
I have 6 siblings - I’m the 2nd youngest, never been married. All of the others were married by the time they were 20. Amongst the FIRST set of spouses, there were two abusers, two cheaters, an addict and a compulsive liar. The only one that is STILL married to one of my sisters is one of the cheaters, since he got all religious and quit fucking around.
As the sibling of these people, I’ve had to babysit and console their kids in the aftermath of suicide and arson attempts, and while one spouse was “getting even” with the other. I’ve hid people out and been the go-between. I’ve even been stalked by one of my ex-in-laws. I’ve wired money to one desperate brother so his kids could eat, and called family services to make sure the other brother’s children weren’t being abused. Oh, and the compulsive liar owes me $16,000.
After all of that (and then the whole NEXT set of spouses - all but the one religious one of them is re-married, but don’t get me started) all I’ve learned is that since you can’t choose your in-laws, you have to choose how you’re going to relate to them. The person that marries your sibling (as well as the sibling of your spouse), is not ANY major concern of yours. Treat them like any new acquaintence. If you don’t feel like you can trust them, DON’T. You won’t be able to make anyone believe you, but at the very least you can keep an emotional distance that’ll keep you from feeling all sorts of guilt later on. Of course, if they’re as bad as you think they are, you are still going to have to comfort the people that ARE affected by it - but at least you won’t feel disappointed. That helps a little bit when you’re running around trying to pick up someone else’s pieces.
In your case, I’d tell your wife what you think of her sister in the most diplomatic way possible, and then let it go for now. If you’re right, she’ll see. If her sister straightens up her act, be as happy as she is. The whole point of family is that you’re the only people who’re going to believe that the best is possible. So voice your doubts in your wife’s best interest, but don’t dwell on them.
The only thing you can give some people is hope. The person that needs it may be your wife more than her sister. So keep that in mind, above all else. Don’t give her false hopes, of course. Just don’t be the guy that predicts inevitable doom - sometimes, being there means more than being right.