Thank you every one for your suggestions.
I had a short time to consider my actions before I was at my mother in law's house. Despite my husband saying not to say anything, I asked his mother if I could talk to her, and I explained the situation. She took it very seriously, and agreed that going to my sister in law would have caused major problems. We have been making sure that the two cousins are always chaperoned, they are no longer able to be in any room alone.
While I am very aware of the future issues that could arise, I feel that being a positive influence for both my daughter and my nephew supersedes the desire to scare my nephew away from my daughter. If I do so, I am afraid he will find some one else to explore with. I want him to know that I am just as much there for him to come to without judgement as I am for my daughter.
Again, I really appreciate every one who took the time to give me their opinion, it certainly helped to harmonize my mind and heart, and take action.