If the two of you (that is, you and the sister) can keep it a complete secret, don't tell him, because that way you get the added excitement of going behind someone's back. Though, that only works if you don't feel that pesky 'guilt' thing people are always complaining about.
In all seriousness, talk to your friend about it, then, regardless of what he says, make a move. Especially if you know/think she'll put out.
In all seriousness, talk to your friend about it, then, regardless of what he says, make a move. Especially if you know/think she'll put out.