Sexually charged behavior of 5 year old- inappropriate?

This is my first question here, and I'm hoping I will get some insightful answers. This will be lengthy and I apologize, but please allow me to explain the situation in full. I am 23 and am currently visiting my brother and sister- in- law for a couple of weeks. They have a five year old son who is a wonderful child, and generally very enjoyable to be around. However, a couple of days after I arrived, I was looking through my suitcase up in the guest bedroom when my nephew entered and closed the door behind him. I greeted him and he asked, "Want to play grown ups?" I said sure and asked him how you play. He started out by telling me we needed to go to the grocery store, preapre dinner, do the laundry. I went along with the game. Then he said it was "time to go to bed" and motioned for me to lie next to him on the floor. I obliged, not thinking anything of it, until he reached under my blouse and touched my breast. I quickly removed his hand and sat up but tried to remain calm as I know he's just a small child. I told him that was not at all appropriate and that it makes people feel very uncomfortable when they are touched in a private area, and to never do that to anyone again. He apologized to me, and then told me not to tell his parents because it would make his mommy cry if I did. Later in the evening, I did end up mentioning what happened to my sister-in-law, just to get her take on it and to make sure I had handled the situation appropriately since he is her child. She became very upset, and told me that this was very troubling because over the past several months this kind of thing has been an ongoing problem. He has been reprimanded twice at school for inappropriate touching of little girls. One incident was a kiss on the lips (that the little girl did not consent to apparently) which is probably rather innocent, but the second incident was his touching another little girl between the legs (also against the girl's will). He has an eight year old sister who has complained of having her nightgown lifted by my nephew even after repeated protestations from her. He has been told over and over and over again by teachers and his parents that acting on these body curiosities that he's having is just not appropriate and must be curbed. I completely understand that children will indeed explore things like this, but when does that type of behavior become excessive? I was compelled to ask for advice after playing with him alone again today. This time he told me we were going to play "boyfriend and girlfriend" and I told him that would be a silly game for us to play, because I am his aunt. He got off the topic and we began playing "superheroes" instead, but at one point during the game he approached me, took my face in his hands and pressed his open mouth against mine in a shockingly suggestive manner. I again tried to keep my composure and I told him that he cannot kiss me that way, that children and adults don't kiss each other that way. He responded with, "But I didn't touch your private parts this time." Perhaps I am over-reacting to this because I don't have children of my own, and I'm not a child psychologist, but his response very much alarmed me. He seems to have a very keen awareness of the impropriety of his behavior, but continues to do it anyway, and even begs me not to tell on him. I don't know what to say to my brother and sister-in-law, I don't know what to say to my nephew, and I'm really not sure what to think of the whole situation. I want to respond and act appropriately considering he is a child, but I do not want to have another incident where I am fondled, or made to feel uncomfortable by my own small nephew. I just don't think the behavior is completely innocent anymore. Am I wrong? Thoughts?