I picked up all of the recommended books at the library, and am reading them now. I did start with "Little Girls Can Be Mean" and it's very interesting! My daughter was with me when we went to the library, and she was very happy that there were books like that out there to help us!
AS for working with both girls together, there's not much "working" you can do when you directly tell a child "do not lie" and she immediately proceeds to keep doing just that, right in front of me and my husband. When I tell my sister about it and she does nothing, I'm just not willing to deal with that.
DD has enough friends that we can use them to pick up the slack, and she can see her cousin the once or twice a year we make the journey. There will be no sleepovers, no unsupervised play, and no more staying at my house. People who don't follow our rules don't stay here, and I don't care if they are family or not. And that doesn't even get into the whole "yo-yo" friendship thing (the book NAILED that-it's definitely what we have here!).
To me the bottom line is if family actively HURTS my child, they aren't family. Just because DD's brain is getting slapped around instead of her physical body, I don't see the need to allow that.
