Egad. Way to get her scared to sleep, Dad.
Not you - I mean the child's father.
Does your granddaughter ever stay with you overnight? Then try an experiment. See if you can get her to sleep without resorting to such tactics. I bet less sugar in the evenings and a lot of physical activity will do it or will mainly do it. Car rides are also lulling to a lot of young children.
If this all works, then share your insights with your daughter and her husband. Maybe they're just at their wit's ends and have run out of ideas.
If this kind of 'treatment' persists then I suspect it's time to be more proactive. Explain, like I said, that this is essentially turning sleep time into a battle. What a terrible thing to be in the back of your granddaughter's mind every time she wants/needs to rest. Feel your daughter out - is this it? Or is your son-in-law doing other inappropriate things while parenting?
Of course, if your granddaughter is being physically injured, then don't pass go, and don't collect $200 - just go nuclear. Not great for the relationship dynamic, to be sure, but if the child is in danger then it's a whole other story.
I hope it's just ignorant parenting and not abuse. Good on you and your wife for being so observant. You can be an advocate for this child.