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Hi - Just so you know my background a bit - I have worked with sex offenders for years. I have also worked intermittently with the victims and their families. What I can tell you for certain is that it IS child sexual abuse. It is punishable by time in prison and should be handled accordingly. Your sister is likely in denial about what is really happening here. And, if the man were to seek therapy with a psychologist (or really any responsible therapist), they are a mandated reporter and he would be reported immediately to the police - as he should be.
There is no acceptable excuse for his behavior at all. What he has done is consequent to rape, as a 14 year old can not consent. He needs help and he is less likely to change if he is allowed to remain in the situation. Another concern is that he could also be abusing or targeting the child's friends. And (although unlikely), if he perpetrates an act upon one of them, your sister is vicariously liable. She could be sued or worse.
All that aside, what is most important here is the protection of the child. I know you want to preserve your relationship with your sister, but the act must and should be reported to the police and/or child services as soon as possible. Of course, I am also assuming that the daughter is still 14. If she is older than 17 now, the statute of limitations can run out in a few years. Please let me know if you have any more questions.
Thanks and good luck.