Am I sinful for shunning my sister-in-law and preventing my wife from communicating with her due to her deviant behavior, out of fear for my daughters and wife?

The default is to presume a Muslim's innocence, and ill-suspicion should only arise with clear evidence, as Allah Almighty says: "O you who have believed, avoid much [negative] assumption. Indeed, some assumption is sin." If what you mentioned about your wife's sister establishing sinful relationships with foreign men while she is married is proven, then this is a grave evil and an ugly act, and a dereliction of her duty to Allah and to her husband. It is obligatory for her to safeguard herself for her husband, as Allah Almighty says: "So righteous women are devoutly obedient, guarding in [the husband's] absence what Allah would have them guard."

She must be advised and made aware of the evil of her actions, and threatened with exposure and informing her husband if necessary. If she does not respond, then her husband should be informed to rectify the matter. It is permissible to abandon her so long as she persists in disobedience, if benefit from the abandonment is hoped for and its expediency outweighs other considerations; otherwise, it is better to abandon the abandonment and continue advising. It is permissible for your wife to abandon her, without complete severance, due to the obligation of maintaining kinship ties. There is no harm in you preventing her from visiting you, or preventing your wife and children from visiting her, for fear of corruption, while maintaining the minimum level of connection that fulfills the tie and avoids complete severance.