Abnormal sexual behavior @ 7?

My sister just caugt my 4 year old son and my 7 year old nephew locked in her bathroom.  She asked the 7 yr old what they were doing and he said they were playing with water.  However, she didn't see any water around the sink or floor.  She looked at my 4 year old and he looked scared.  She then asked him calmly what had happened, and he kept looking at his 7 yr old cousin who then said they were just playing with water.  My sister told him she wanted to hear from my 4 yr old son what had happened...he then said that they were making each other's private parts touch.  She then excused my 4 yr old and talked with the 7 yr old.  

My husband and I always talk to our kids about who they should show their private parts to, and this is my nephew's 2nd time.  The first time he was 6 yrs old and was caught locked in the bathroom with my 4 1/2 yr old daughter.  We thought then it was just curiosity, but now that he's almost 8 years old, we feel it's becoming a problem.  Is this normal sexual behavior on my nephew's part?  We're also concerned that he lies about it.

We look forward to your response.

Thanks!