There is ALWAYS a line with the 'its my money, its her money' thing. Always. If you are sending money to an ex? Is it still your money? If she is sending money to her ex is that her money? There is a moral / ethical line even if you keep separate accounts.
This is what I suspect about her brother. Assuming she has a 'decent' amount of discretionary income. A prisoner doesn't need a lot of money. A hundred bux is more than enough in most prisons. You have prison commissary, for extra shit. If you are serving your time quietly, you might want some extra snacks, chips, stuff they don't serve at chow. Its not a lot of money. If she is short, its a whole lot of money. There are only 3 main reasons why a prisoner needs hundreds of dollars or so much she is short of money: 1. He's gambling and can't pay his debts and/or 2. drugs or 3. He's getting punked (extorted) for money by others up to and including paying for protection.
My guess is your wife doesn't know all these. My guess based on what you said. 99% chance is number 2: drugs. He's getting high as f*ck and buying drugs on credit. He told her some lies that she wants to believe because its her brother.
If the roles were reversed she wouldn't okay it. You know it and I know it. I've seen relationships break up over stuff like this. She can and seems to be arguing that her brother is within that moral line. To an extent yes..an extent but morally I would argue it doesn't cover everything. Helping him get a down payment for a car, apartment, is understandable. Helping him pay for a training course. Things to better yourself is understandable. My advice? Have an agreement with your wife that no matter whose money, you help relatives when its to improve themselves or medical emergency. The gray area would be bail if they got arrested and things like that doesn't fit the aforementioned.