My mother-in-law has two daughters. Her daughters are like American girls, going out with guys and one even married an American. But my mother-in-law, instead of punishing the girls, covers for the girls saying "no, they are going to their grandmothers house or they are going to their dentist". If they are late at night, or are with a guy or staying over night with a guy she says "she is in her room". Is there anything I should say to her? Because I think she is encouraging these girls that its okay for them to do this. Isn't this a major sin that my Mother-in-law is doing?

Praise be to Allah, the Lord of the Worlds; and may His blessings and peace be upon our Prophet Muhammad and upon all his Family and Companions.

There is not doubt that woman's mixing with men and having an affair with them is wickedness, and a believer does not do such things. So, it is your duty to advise you mother-in-law and her two daughters to urge them to avoid such misdeeds, and to remind them of Allah and bad consequences Here and Hereafter. Then, you are to remind their mother of her Shari'a duty to keep her daughter's honor and to make her know that concealing her daughter's misdeeds is very bad. Then, a daughter whose husband is not a Muslim should be divorced at once, since such a marriage is Haram and even believing in such a marriage as Halal constitutes a true disbelief.
Again, more advice is needed, and you are to inform your husband of such things (or anyone who can stop such a crime). It is Haram to keep silent if they do not give up such bad deeds; otherwise you might be a partner in sin.
In reality, such deeds are a natural result to living in non-Muslim countries, where a Muslim loses control upon himself and his family. Then he loses his religion.
Thus, we advise every Muslim to leave residence in non-Muslim countries if there is no dire need.
We pray Allah to protect all of us and to guide us to every righteous deed.
Allah knows best.