What the effect does, is "distorts" a plane in accordance with an image below it. Detecting differences in dark and light, it will guess the 3d form of that image and "projects" your plane [the flags] onto that form.
What I'd do, is use the "blend tool" to create a pattern of 'cylindrical' looking things. With thee blend tool, set the shape to bilateral. This will allow you to make nice "rounded" cylinders. Think of these cylinders as being the "wind" beneath the flag.
I'd love to do a tutorial, but I've got to head to work in about 15 minutes. So this afternoon I'll see what I can do, and update this post.