Your post reads nearly identical to something that happened in my family a long time ago. I was 5 and my mom's sister's oldest son was 8 or 9. He forced me to sneak away from everyone with him and made me drop my pants. I was so little, I can't tell you if he touched me or not; he's probably the only one who can. My parents are on the ball and they figured out we were missing maybe 5 minutes after we disappeard. How it played out from there: Aunt and her family make like bats out of hell and leave immediately. My mom and dad are freaking out at me until they realize I'm a five year old kid and this was not my fault. Then they get pissed at aunt/uncle/cousin. My mom tells her mom; tensions rise between mom and her sister, and we skip a bunch of family gatherings. Mom tries to get sister to recognize that what happened was not okay, some sort of apology, some acknowledgement of the fact that her son was exhibiting predator-like behaviors, possibly actually molested me - otherwise, only failed to do so due to a fortuitous interruption-, and should get therapy/treatment. Mom's sister kept playing it off - "they're just kids", "nothing happened", "she was leading him on" (<- I don't fucking know). My mom's mom decided that as a goodnproper Catholic family, our refusal to attend family gatherings is a sin. She bullies my mom into returning with the whole "We'll be able to keep an eye on them". Nothing was ever reported - maybe nothing to report, truthfully. Or maybe there is; what if he assaulted someone after that? No one has ever said anything to indicate that he has in the 15 years since that incident, but when my parents found us in the basement, it was probably the third or fourth time he'd harassed me, tried to get me alone, tried to convince me to get naked for him. There was a pattern and everyone ignored it.
The way everything played out with my mom's family ended up ostracizing me. My grandmother had no sympathy for me, the 5 year old near-victim. I was brought back into the family gatherings, but when the kids went downstairs to play I was forced to stay with the adults, not my cousin - in my young mind, I was the one punished. This went on for probably 5-6 years, and I was always made to feel like I was the one at fault, the one who had put this burden on the entire family. It took 14 years for me to get to a place where I could look my mom's family in the eye without being ashamed; now when I look at them, I'm overwhelmingly disgusted. They enabled and defended my cousin and hung me out to dry.
Here's what I would want someone in a similar situation to take away:
Filing a report with the police, even if nothing else happens, puts it in the record somewhere. If your niece grows up and remembers this, I would think there's some comfort in the knowledge that her being molested was not ignored for the sake of the family. It shows that her family cares about her wellbeing and is willing and able to tackle the hard issues in order to protect her. It makes it easier to live with.
As far as depriving your niece from nice holiday memories goes, as an adult I have 0 nice holiday memories. Some of my other cousins are awesome people and we had a great time growing up, but seeing the cousin there too and having to hang out with him like nothing was ever wrong just overwhelms my recollections. I get uncomfortable when he touches my siblings or any of our younger relatives (like to tickle them or give them piggy back rides or even hugs) and I want to leave the room but I also feel like I can't because someone who's not an idiot has to be there to chaperone it. I get angry when I see my grandmother, aunt, or uncle because they are all villains in my story. Ultimately, I wish we had cut them out of our lives. It's not an all-or-none deal, just cut off the guilty.
The bright spot: my mom's brother heard about what happened and flipped the fuck out. He is my advocate during these gatherings, he has never made me feel like I'm worth less than everyone else, and his outrage really resonates with me 15 years later. Having an aunt or uncle on your side through something like this is pretty invaluable, so props to you and please do keep it up. I cannot tell you or anyone what to do, but I hope that this does get reported. Otherwise, you kind of just feel like you're waiting for him to hurt someone else who has the balls to speak up, which I guess does make you complicit.
Sorry for the wall of text. I haven't told a lot of people this story, and there are a lot of incoherent feels. Best of luck to your niece and to you. I'm pulling for y'all.