Is it possible that you are trying too hard to comfort him. When we keep explaining and returning to explain and reassure over and over we begin to feed into their fear. i.e; "if there are no bad guys, monsters why do they keep talking about them?" sort of thing.
Bad Guy Spray is often helpful. I'd try telling him that there are no bad guys in his room after you finish spraying. Then, if he cries, return and tell him in a firm voice there are no bad guys: that you are confident that he'll be able to calm down (I'd stay in the room until he's calm) and know that they aren't there and then leave. Give him a chance to see that nothing happens and that he is capable to deal with his fears.
Has your SIL tried playing soft music or having some sort of white sound to cover the normal noises at night? Another thing to check is if he can hear any sort of noise or voices especially if they live in an apartment. Perhaps he hears the TV that the parents are watching.
Does he have a security blanket or it's equivalent? Both of my grandchildren have stuffed animals and do seem to feel some fear when they've forgottent to take them to bed with them.
Could he have begun being "scared" to get more attention and as a result has now convinced himself that there are bad guys?
When my grandchildren were afraid of monsters near that age their mother was very matter of fact. "There are no monsters." She did go thru the room with them a couple of times but after that she just said, "there are no monsters. Go back to bed." I think that this worked because first she acknowledged their feelings, showed them the room was safe. and then was confident that there were no monsters. Kids trust their parents. If the parent keeps trying to reassure them perhaps there are monsters or bad guys. Otherwise why do they keep coming back to tell me there aren't. The kid is able to sense the parent's concern and focuses their thoughts on the bad guys. This is related to the saying, from Shakespeare I think, "me thinks that you doth protest too much" which indicates that the opposite must be true.
My grandkids also watched Monster, Inc. which I think helped them to associate monsters with being good. They focused on the good monsters with a little help from Mom and me.
Since the toddler tells his parents he's afraid of the bad guys this probably isn't night terrors which may occur at this age. However, it's possible that he is having bad dreams. Is he also able to say what makes the bad guys bad? If he remembers a dream have him talk about it.
Another less likely cause could be that the toddler hears himself or someone else referred to as a bad boy, bad guy and when this is combined with the religious idea that bad people go to hell could result in fear. It did for me. I still become emotional when I hear my daughter tell her children, "you are a bad girl/boy" when they do something wrong. No one is bad. Everyone is good but we all do bad things. For the Christian it helps to remember that we are made in His image. That includes children.