First off, sorry that you find yourself in the middle of all this. Infidelity is one of the most extreme forms of abuse that one human can inflict upon another. There is a whole book dedicated to this mantra, but "the body keeps score" is a very real thing and clearly your Brother-in-Law's (BIL) body and mind are showing the signs of trauma, he just doesn't know where the trauma is coming from.
Let me ask you a hypothetical question, rather than discovering your sister's affair, think about a role reversal, say your BIL was being physically abusive towards your sister or your niece, or both. Would you sit idly by while that abuse of your sister and beloved niece continues? Of course you wouldn't. You would be moving heaven and earth to make sure that your sister and niece get out of that toxic and abusive situation. I mean, it's your sister and niece, blood relatives that you would likely do just about anything to help and it's perfectly normal to have that reaction.
Now, I understand that your BIL is not blood family, but he is the father of your niece and your sister's husband. He is family nevertheless and for better or worse, because he is your niece's father, you and him will always be a part of each other's lives in some capacity. What you have discovered is that your sister is mentally and emotionally abusing your BIL and she is cheating on your niece in the process. Another hypothetical, say you found out not about your sister's affair but that she was poisoning her husband's food with arsenic and she was basically slowly killing him. Could you stand idly by while your sister slowly kills your brother-in-law and the father of your beloved niece? Of course you wouldn't sit by and not do anything. Any sane and empathetic person would be ringing all the alarm bells.
Here is the thing, to be the best of our knowledge, your sister isn't physically killing her husband with poison, but we know that she is undeniably killing him with mental and emotional abuse. Not to mention that since he is unaware that she is knocking boots with her boss, she is exposing her husband and the father of your niece to god only knows with regards to STDs and other nasty shit that Affair Partners (APs) are exposed to.
What you described to us here is that your sister is just a run of the mill cheater. Tongue-in-cheek around here, we refer to a mythical "Cheater's Handbook" because when you've crowdsourced as much wisdom on infidelity as we have here, with such a large data set (unfortunately infidelity is far more common than most folks realize), patterns emerge. One of the most common is "rewriting the marital history" which is exactly what your sister is doing. You and others didn't realize she was "unhappy" in her marriage because she was perfectly content, until this guy came into her life and started giving her the attention and fed her ego kibbles so that he could get into her pants. Suddenly, her husband is the enemy and the AP is the greatest thing ever and he makes her happy. That is like page 2 of the Cheater's Handbook and if you stick around here long enough you'll feel like you've read the whole "thing" cover to cover.
You said it best in your post, your BIL doesn't deserve this. I know that not everyone has close relationships with their in-laws, and my family has been no exception to that, but you are absolutely right, even if your BIL was a raging piece of crap and you didn't like him, he doesn't deserve any of this, because the reality is that no one deserves to be cheated on. Also, since you mentioned it, the Other Betrayed Spouse (OBS) is also being harmed. Her Wayward Husband (WH or in this case your sister's AP) is also directly in the line of fire for STDs and they have a 5 month old baby, which fits within the timeline that he was likely sleeping with your sister, so we can deduce that his Betrayed Wife (BW) is unaware of his infidelity. Not to burden you with further guilt on this, but your sister's behavior is destroying her family and the family of her AP. Not to mention the ties that this AP has to your family's business and how it could impact the lives of your parents.
I do not envy you or the position that knowing this information has put you in. I'm sorry to tell you this, but given the grave nature of this situation and how this AP is so enmeshed in the lives of your whole family, I feel that you are left with little choice but to do immediate and full disclosure to both your BIL (as the Betrayed Husband) and if you happen to know her, the OBS (AP's wife) as soon as possible. I'm saying that with the assumption that because the AP has worked with your family and you know about their young children, etc. that you may even know her or have her contact info. The point is that both Betrayed Spouses absolutely deserve to know what has been going on. At the very least, exposure to your BIL should be done immediately and allow him to decide what he wants to do about the OBS, but she should be told eventually. Hell, you can even point him here and the folks here will be more than glad to help him navigate this awful situation.
I mean, it sounds cliché, but think of the innocent children in all of this. One mother and one father are playing a very dangerous game of STD chicken that could devastate their whole families. If the AP's kids don't tickle your empathy, think about your niece. Do you really want to see your niece grow up in a toxic environment where her mother is abusive towards her father and her father has to seek medication and help from the constant abuse being inflicted upon him by the one person in his life who swore to never do such a thing? She is an innocent 2 year old girl caught in the crossfire here and this will absolutely fuck her up living in such a dysfunctional household. Your sister's excuses and whining to you about blackmail and her happiness is just a selfish, no good cheater and at this time she is being a negligent and terrible mother.