I think that I would entirely keep your daughter away from this cousin. Depending on how much you love him and care about him, and given that his parents are stonewalling, since he is nearly a man now, maybe in your shoes I would be tempted to have a talk with him personally and alone. I'd approach it (with my 18-year-old nephew, with whom I have a good relationship) like this -- "I think you are acting sexually obsessed with [daughter's name] and I totally expect you never to act on it again. I love you, but I absolutely will not let you harm my daughter. More to the point, I want to see you get over this and want you to get some help. What is going on?" Then see what he says. Maybe he is being abused, and feels he can't tell anyone. Maybe he feels helpless or powerless in some family situation and is acting out. In any case, he will understand, then, if you are vigilant about your daughter.
You are definitely not crazy. I worked for CPS and interviewed tons of children. They do not make stuff up. You need to speak with a Social Worker about this and make sure that he is not going to touch another child. Just imagine what could have happened if you wouldnt have entered the room. Does he have a sister? I would be concerned about her also. Dont just protect your own child, consider other peoples children also.
Thank you so much for your comment. I haven't told anyone but my mother and she is trying to look at it from both sides. It is nice to hear someone tell me I am not crazy. Thanks again...
I don't suppose you are going crazy, and I don't think your daughter misconstrued the situation. You should keep your daughter away from this kid, even as he gets older. It is possible that he is just obsessive about your daughter, but if he is not given access to her, who knows what direction it will go. I'm sorry your sister doesn't believe you, this kid needs help.