yes, you should not feel bad about contacting social services/police. This is a very serious act of abuse on your neice. I would also be interested to know how old your nephew is, and the age gap between your neice and nephew. Like some have mentioned, it is quite possible that some form of abuse is happening/happened in your own nephews life. A lot of children who have been abused 'act out' abuse, and present with sexualised behaviours and behavioural problems.
It seems that his parents are in denial about what has happened, and not willing to accept his behaviour (for the sake of his potential success in sports), and also it probably hard for them to accept what has happened. Denying his behaviour, could pose a risk for other children. They may not take the approriate actions/cautions necessary to protect him from doing anything again - which is your concern. Considering this, I think somebody needs to take some action towards protecting other children - and possible help for nephew.
Bottom line, your neice has been sexually abused, and I think efforts need to be made so that it does not happen again to her (or another child). this is a very serious concern, and i think something should be said. Perhaps, you could discuss your family's reactions (which you have mentionsed on your post) with social services/govt. deptartments, too see what they could suggest. And like someone has already said -making an anonymous report might be a good idea!