I would do something about it. Use the law. She is only 8 years old, unless she had a messed up upbringing, she is way too young to be making this stuff up or seeking revenge or something.
Even if you don't win, his reputation will be ruined beyond repair. He will be in all the newspapers either way.
Also on the analysis of memories before I had fully coherent memories (when I was 4). I did have some memories, but for some of them, I can't tell if they were dreams or real. I know some of them were dreams because they were ridiculous (monsters, ect). However, I would never have a dream of something sexual because I had no idea about anything close to that stuff when I was that young.
Maybe my advice is not whats best for your sister. I do not have a sister so I can't tell. Maybe its best to focus on her current needs and maybe using the law would be a painful process. If you decide to go that route, I would still go and confront that 20 year old in secret (without your sister knowing). Strike fear into him, tell him you know what he did and you are the most furious you've ever been (and will be) in your entire life. Don't debate with him, if he tries to prove you wrong, tell him you're not interested in what he has to say and walk away. Trust me, even if the incident is never brought up to him again, that sort of confrontation will mess him up to some degree. He thought no one will ever know and its the perfect crime.
Maybe even make some threats, even if you don't intend to carry them out. Like if you ever find him babysitting again, you will take it to the law. Let him know that even if he is found innocent, his reputation will be damaged beyond repair. In most cases where a sexual abuser is found innocent, the newspapers don't report on the innocence part, just the accusations.
