There are so many things to think about that I'm not sure you'll get the "right" answer as opposed to just helpful information in deciding what to do. Especially since you know these people more than we can ever know.
As far as what the kids have told you, they are reaching out to you for help whether they realize it or not. If you don't do something, perhaps things could work out, but on the other hand the kids could resent you for it later if things get worse. (Notice I said could.)
Here's some things to think about:
Is it possible for you to be able to keep them more often? Tell your sister it's for her benefit to be able to not have to worry about the kids. (I don't know if you are actually able to do this, so it's just something to think about)
Do you think the kids actually want to be taken out of their home? I say this as a very much thought of question with several consequences/outcomes. The children probably love their parents, but just don't want the negative things that are resulted at them. If they were to be taken from their home, per a court order (per se') then a court is more likely to look toward family that would be able to provide for them vs. the state. If it's possible, I would discuss this with their therapist (in private, of course).
Would you feel comfortable asking your sister how she is with the kids to see if she'd tell you things that the kids are telling you? Sometimes if you can get her to bring the discussion up, then you can share your feelings knowing she's actually hearing you. The primary focus is the kids.
There's sometimes an 800# that you can call to ask for legal advice about this sort of thing, so maybe you could look into that.
I don't think you should keep quiet about this, but it's a matter of who you want to talk to and share this with to start. I think if you share this with their therapist (if you think that could help) then perhaps the therapist could find a way to bring it up and "get it out" in a session so it can be discussed. Sometimes they can be creatively sneaky about that (in a good way). Even if the kids get removed from the home (for whatever reason) temporarily, I do feel they would look back on things and thank you for your part in trying to help them. I don't know that it would happen right away, but the fact that they are sharing with you things that are personal to them, in only a matter of a couple weeks, shows that this is something that is hurting them that they want help with. It's a part of their life, something they have to live with and, being young and naive, just don't know how to ask for help the right way. Good luck with what you decide. I hope this gave you some food for thought.