My (f,1) baby was taken advantage of by her uncle (m, 5)

I am a new mom, and my daughter is about to turn one in a month. We currently live with her grandparents, my boyfriends parents. His parents also have a 5 year old, Ethan. It's a pretty full house but we have our own area and only have to share the kitchen, but now I feel like we're trapped until we can get into our apartment. I'm not sure if I'm overreacting, I've read into the red flags and normal vs uncommon behaviors for Ethan's age group, trying to see if it's a normal phase or not but I'm not coming up with a lot. I have the worst pit in my stomach and I feel the need to do something or at least learn how to approach this. I'll just explain the situation and give a little backstory and maybe experienced parents or someone who works in the field could give me some advice/info.Since he found out I was pregnant, Ethan has been ecstatic to be an uncle. He's honestly a really difficult kid, but he's always been positive about his niece coming along. Once she came though, he had horrible sibling rivalry, if that's what you could call it. His mom and dad would be cooing over the baby, and he'd start hitting them for attention, or screaming, or breaking stuff, just always through a tantrum the moment he realized he wasn't getting attention or negative attention. Once baby got older, he'd demand to play with her, and then shove her down when no one looked. He's been spanked for scratching her face, he pinches her, been told no plenty of times and in a way I think is too lenient. For some reason, everyone talks to the kid like he's fragile and going to break, and I think he picks up on this, so when someone tries to teach him right from wrong, he just screams cuss words at you and cries, or runs away and ignores you the entire time you talk to him. He's told us he likes the sound of the baby crying even. I really don't want to sound offensive, but this kid shows signs of being a sociopath. Or he's just an extreme case of jealousy. He couldn't handle being told no, or to be quiet, and honestly it's not his fault. His dad works all day everyday to provide while his mom tweaks/sleeps out in her room, leaving the kid alone all day long to roam and do what he pleases. He's been brought back by neighbors for leaving the house naked and wandering around town, he beats the dog with no repercussions, makes any mess he can, etc. Just think of the nightmare your five year old could cause without supervision, and that's what his mom willingly chooses everyday and then rapid cleans before her husband gets home. Trust me, I know. I honestly should call DHS and report her treatment of him or at least tell his dad, but the whole family has agreed to not say anything to Ethan's dad or make a report, and my boyfriend & his family have demanded I do the same. His dad is aware of the problem but we think he's in denial about how bad the situation is. When we told him what Ethan had done, he just turned red in the face and dismissed us, said he'd talk to him. The man is a great dad, but being gone all day until right before bed time doesn't give a lot of parenting time. He just wants to have a good time with his kid when he gets home, not punish him every time he walks through the door. It's a rock and a hard place for sure. Well, allowing Ethan's behavior for this long and complete lack of parenting has probably led to the event that happened last night. My boyfriend and I were making Ethan and the baby some dinner while they were playing in the kitchen together. At this point, from nova being hurt so much by him we can only let them play right in front of us both. If it's just one adult, the kid still does fucked stuff to the baby and just walks away quietly & mad when they tell him to stop. Bf and I round the corner for a second to put away some pots, and when we turned back around, Ethan has her hand shoved against his little red dick. Ethan's face when we all made eye contact was too revealing of the situation. He looked like he had been caught doing something bad . My bf snapped at him pretty fast, clearly upset but tried to word it in a way where Ethan could understand he can't be doing that. Ethan just turned on his heel and went to sit with his dad in the living room. My bf and I were pretty taken aback, since we never thought Ethan's bullying would turn sexual in any way. We both had no idea how to handle it, so he went to tell his & Ethan's mom what Ethan had done. I guess she was half asleep and just asked that he be sent down there to talk to her, but we both don't know what became of that talk. My bf went to get Ethan, and he wouldn't even look at him. His dad told him to listen, and to go see his mom, but Ethan wouldn't budge and started glaring at his older brother. His dad asked why he wasn't listening, and my bf told the truth, Ethan was acting weird because he just made the baby rub his penis. Ethan's dad's face turned pretty red and he made Ethan go downstairs, and just told us that he'd talk to him and dropped it at that. I'm sure he's embarrassed because we've had to go tell him countless times of Ethan hurting the baby or trying too, or even Ethan's dad catches him doing it. The whole house is very aware of Ethan's bullying and being a bad kid in general, but they all insist it's a phase. My bf and I have been told not to parent Ethan either, and to just get his mom or dad if he's doing something, but clearly that hasn't been working and I could see on his dad's face he felt embarrassed about it all. I feel embarrassed as well. I've always had a pit in my stomach about this kid but was never allowed to say anything because he's "family" or "it's not my place". I really feel like it's my place now, and it always should of been. I'm just not sure what to do or how to go about this all. I know it's a sensitive subject and if we handle it the wrong way, it could hurt Ethan even more. We move into our own place in a week, so we won't have to worry about letting the baby run loose, but it doesn't change family. Ethan is still her uncle, and the family still wants them to play together and him be invited to her birthday party coming up and I just feel alone in defending my baby. I know there are a lot of specifics in situations like this so if anyone has questions, please ask away. As I've said before, I'm new to parenting and didn't think I'd have to deal with this ever. Thanks so much. via /r/Parenting http://ift.tt/2rUOUDP