You are giving good advice. She should not let an unlicensed driver drive her car. The registration and insurance issues just add to the problems. Feel free to reach out to our firm to discuss in greater detail. But the short answer is tell her to stop allowing illegal activity in her car.
An unlicensed driver should not be driving the vehicle. There are also financial responsibility laws in your jurisdiction. In the even of an accident, the registered owner may have liability for knowingly allowing an unlicensed drunk driver to drive the vehicle. You should contact a local lawyer for more specific advice.
This is tough. I would sit down and have a conversation with your husband's mother about letting her daughter (your sister-in-law?) drive the vehicle. If you are seriously concerned about the safety of others, you can always contact local law enforcement - but then you risk having criminal charges filed against your potential sister-in-law as well as the mother. I would not recommend taking that course of action.