People actually develop an allergic reaction to cigarette smoke, and even without it not having clean air can aggravate the sinuses and lungs. However, if you take a person with an allergy out of the environment of that allergy their symptoms get better and if they're away from it long enough the symptoms usually disappear. Cigarettes are also known to cause havoc on a persons immune system, making it weaker... so I suppose it's possible that second hand smoke makes the children more likely to get sick. So yes, it's possible that the second hand smoke is causing your nieces problems. Either way you might want to make subtle comments to your brother/sister to see if they would be willing to smoke outside away from the children. Also if their breathing is very labor-intensive, they could have asthma or an infection and probably should see a doctor.
You can't smoke around children. It's extremely selfish and is child abuse, I think.
I would be very worried about it! I would not let my kids be anywhere near second hand smoke. It's especially bad for them when they are young and their lungs are still developing. If they had no choice but to be in that environment I would get a filter for the room. My wife is allergic to our cat, and I got her an air purifier for specialized for pet hair that really helped (http://www.pureairsupply.com/what-best-air-purifier-for-pets/). I would imagine that they also make ones specialized for cigarette smoke too. It would be better though that they not be exposed at all!