Customer said that her sisters husband is a diplomat to a foreign country. Is this customer then a PEP?

It really depends on your FI's definition of a PEP. In a situation like the one you describe, we would require more info to determine if there is any relationship between the customer and her sister's husband.

Identifying family members and close associates of PEPs is difficult at times, as it depends to some extend on the social, economic and cultural structure of home country of the PEP.

a diplomat to a foreign country

Representing which country - the United States??