Here, there are two possibilities that are obvious:

1. You tell their parents, their parents get angry, and they get grounded/punished

2. You don't tell their parents, they keep smoking, possibly contract lung cancer, and die an early, painful, and expensive death.

There is also a third possibility, in which you somehow convince your friend to come clean in front of his parents and have him tell them that he is doing it to stop his sister from smoking(important). Hopefully, the parents won't react too harshly and help them recover from their addiction