I am dealing with a nearly exact situation right now, from the other parents (in-laws) perspective.
I am totally surprised by the many posters here in total support of this being "normal" behavior. Perhaps it is easy to call this "normal" for the boy who decided to satisfy his curiosities, despite being recently told not to touch others' privates. What about the experience for the 3 year old girl? She most likely looked up to the older cousin and didn't realize that she was uncomfortable with the situation until all was done. Is it considered "normal" for a 3 year old girl to have her genitalia explored by someone other than herself? No, it is not normal for her.
I think in situations like these, it is SO important to separate the individual experiences for the involved children. In many cases, they did not share in the same experience. For him, he was just curious, and meant no harm. For her? Chances are that she was confused, felt led into the situation, and now has a lasting impression of discomfort. Just because he meant no harm to her DOES NOT mean he did no harm to her. She may be desensitized to the importance of privacy. She may be confused and think that it is normal for older children to touch her privates. She, God-forbid, may now "play doctor" with another child, thinking it is acceptable, only to perpetuate harm under the guise of "exploring each others bodies".
I allow each of my children to explore their own bodies privately. I expect it. I am also in support of calling this "normal", if it is the first time, and the child has not yet had the "boundaries" talk. I absolutely do not think it's "normal" if all children involved do not have a positive experience that satisfies curiosity. If a child leaves a "doctor" session feeling sad and violated, who are we as adults to call what was done to her "normal"?
What about some respect for the young girls' innocence and privacy?