I agree.
What you might want to do is go the parents of your nephew 9brother/sister?) and say that what they are allowing their son to do is very illegal and that if they don't correct it themselves you may have to take care of it for them. To me this is no different that bringing in ringers with faked birth certificates to play against kids that are younger than them.
You might also explain that this does not make your nephew a better player and in fact probably will hurt him as he goes along in his baseball 'career'. He will be in for a major shock when he does move up and finds out that he isn't the dominating player he thought he was. I've found that 12 year olds thrive on a challenge and tend to become complacent when they don't have it. Your nephew should be playing to his talent level and having him blow away a bunch of kids that are younger than him doesn't improve him in the least.
As another poster said you already know the answer. It is just too bad that your brother/sister doesn't seem to realize what a bad example they are setting for his/her son.