Welcome to the site.
I am sorry to learn about the predicament that your family finds itself in but you may find it surprising that this sort of behavior among children of her age is not uncommon and this can be considered as an Attention Seeking Behavior, which she has adopted owing to a sense of insecurity and lack of attention and importance that she is thinking she is getting from her parents and important others owing to their primary focus towards the younger sibling.
So taking away her toys and previliges would add more fuel to the fire of angst and apathy which is burning inside her and make her more rebellious and disruptive. So i will suggest that you ask her parents to stop using punitive methods like taking away her toys and previliges or raising hand on her, instead they should adopt a more affectionate and loving attitude where in they should sit her down and talk to her about all the concerns that she is hiding inside her, to begin with the conversation they should assure her that mommy and daddy love her as much as they love the toddler if not more and there should not be any doubt in her mind about this. The reason that younger one is given more time and attention is because he is incapable of taking care of himself, in fact the parents should encourage her to get involved in the rearing of the younger sibling so that she feels wanted and becomes secure as an elder sister plus her attention could be shifted from her presently acted upon disruptive behavior.
So the bot***** *****ne here is that she should not be punished but she needs to be talked about the problem and try to reasonably solve it in the above mentioned fashion.
I feel most likely outcome of the talk and assurance given to her would stop her behavior but if this fails then you may consider consulting a child psychologist so that the parents can learn tactics to counter attention seeking behavior of hers.
I hope this helps.
Wish you all the best.
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