There you have it, then. Your husband's great grandparents are malignant narcissists from what you describe (google the term and see if you agree) and they are controlling the entire family.
Somebody will have to say NO MORE and it seems like that person will likely be you.
Regardless of anything else that may or may not happen, you need to protect his target (your 12 y/o daughter) as well as your other bio kids.
Please know that unfortunately changing these types of family dynamics, because a) they have gone on for so long and b) the persons who are "in control" are usually severely mentally ill, controlling, angry, damaged, vengeful, etc. themselves.....is very rare if not impossible. It is impossible for sure without everyone involved admitting that change is needed and then investing many many hours (years) of therapy.
It's encouraging that your husband and his parents, especially your mother in law agrees with you at least in part that SS is troubled and that his behavior isn't normal. That is a start and offers some hope that your marriage is not the problem, rather it is these great grandparents and the influence they hold over everyone excepting yourself.
However the problem still remains, and you have younger children to protect from SS, so in that sense the situation is the same.
I hope we are some small comfort to you. I still suggest you talk to a lawyer about child endangerment and child custody concerns. Another mandated reporter may see this situation very differently from your stepson's therapist.
