Is your sister in law saying that you should have fake LVs b/c the real ones are unethically made with leather? She's clearly jealous of your bags if that's the case. She may think that she's P.C. but diamond mining is a far more contentious issue than animal rights world wide. Most cowhide used on leathergoods comes from cows that are already going to be used for food. I hate to say it, but those cows are going to be slaughtered regardless, thus, one might as well use every product that comes out of the animal and not allow for waste.
In the case of your sister in law, however, there are alternatives to buying blood diamonds, which she ought to be made aware of before she begins ranting and raving about her so-called "beliefs." She should either buy canadian diamonds (like you), or vintage jewelry if she really wants to be honest with herself.
She does sound like a hypocrite, and an unpleasant in-law, to boot!