This has happened to me too.... almost the EXACT same thing. LOL!
What can help to transition her to her own room, is to get her her own bed and room decor which SHE helps pick out.
Then, talk with her and explain that this is her room now, she's a big girl etc.
Let her in turn talk about what she is going through and comfort any worries in her....and it validates them too.
Then, put her to bed in HER room/bed... and have a regular routine, the SAME routine EVERY night... for example: read to her for about 10 minutes, then tuck her in, give a kiss, then (what me & Hubby did) is we sat in her room with her in a big comfy chair, turned off the lights, gave her her own girly flashlight to keep in bed with her, then explained that it's quiet time... no talking or playing etc.
Then, we agreed that we would sit with her in her room to keep her company, until she fell asleep, then we would leave. We ALSO explained to her that we would not scold her and if she was scared or needed us, we were there for her, or she could come and get us.
And yes, as the previous respondent said, it's important to have some kind of ROUTINE and structure pre-bedtime, and for bedtime. Kids need this and so that they "know" what is coming up. My kids have a routine and like a clock, they know it. Also though, your sister-in-laws girl is in the 2's age... so it's naturally and developmentally a hard age.
Routine. This is what helped with my girl and what we did. HOWEVER, since your sister-in-law's daughter is used to co-sleeping with her parents... they need to allow the child room for error and to adjust to the "new" sleep routine. Of course, there are still times, when my girl is afraid of the dark or "monsters" etc. (this is all normal and developmental, they reach an age where night time things scare them and its OKAY). So with this understanding... we let her come to bed with us if she is feeling afraid of the boogey-man or the dark etc. But it is okay with us. We still sometimes all sleep together in the same room, my 22 month old son still in his crib in our room too. But, for the most part.. my girl has matured and is now used to sleeping on her own.
As a baby & toddler, and sometimes even now... my girl has always been very "active" cerebrally, even in sleep, and she even talks in her sleep, and she is bright & noise sensitive. She did not sleep through the night, until just before I had my 2nd child... and she was about 3 years old then. Her brain is just so active and she sometimes has night wakings...but as she's gotten older, she now can automatically go back to sleep without a hitch. Every child is different... I tend not to like "boiler plate" techniques in getting a child to sleep through the night...each child is different and responds to things differently. My firstborn and 2nd child are completely different from each other, and what worked for one, didn't work for the other. MANY children, even at this age, do not sleep through the night. Main thing is that the child is not "scolded" for it or made to feel negative about it.
Sure, it's the "habit" that the child is used to, and what is okay for the Parents. Each family is different. Some families co-sleep, and some don't. But, any sleep routine change is a transition. It won't happen over night. And, it won't be perfect every night. Each child is different and has different needs. ALSO, kids this age can have "night terrors" or "night mares" too... and this can scare them. It's all developmental.
But, getting them used to sleeping in their own room and their own bed, is just another "milestone" and it will happen sooner or later.