Leo and Erica's past relationship

Was there really something between Leo and Erica when they were teens?
Of course, it's obvious that Leo has a big crush on his cousin. But nowhere in the movie have I felt this feeling was reciprocated. Erica loves Leo, no doubt on that, but maybe just as her cousin. She seems to have much deeper feelings for Willie (at least until she learns he's a murderer), being thrilled when he proposes, telling him she loves him, initiating sex with him, etc.
I know there is a scene where Frank tells Willie that Erica and Leo were once "caught" by Erica's mother when they were teens. But why does everybody seem to understand this as "caught having sex" ? Could it not just mean "caught kissing", for instance (after all, they're supposed to be only 15 at this time...) ? And, more important, did this really happen at all ? I felt Frank was telling a lie to Willie in order to make him hate Leo and maybe to make him kill his best friend, so Frank would get rid of Leo while keeping his hands "clean". Or maybe because Frank's wife seems un-enthusiastic (to say the least) at the idea of her daughter marrying Willie, and Frack himself may be reluctant to let his step-daughter marry a man who works in the "business". So maybe it was just a fake story to break their relationship . Or am I completely wrong ?