Jay,
I've been playing with this question for a while now and have come up with some ideas that seem to work. BTW - I really like the plastercine "mold" idea!
I take magic sculpt. Roll it out flat, then place it inside a ziplock bag dusted with talc powder. Make sure the powder is well spread thru the bag and any accumulations of powder are at the bottom of the bag so as to not make unseeemly pock marks in the flag.
I roll the magic sculpt flatter and thinner in the bag with a rolling pin and let it set for about 45min. I cut out the square or dragon tail or whatever shape the flag is to be, remove it to another flat surface and peel away the ziplock plastic.
Before doing all of this, I find the flag I want to make, reproduce the design at Kinko's to the correct size for the scale I am working in and make a decal by putting decal paper into the color copier.
Now, back to the flag that is still damp and maleable... I apply the decal to the flag and as it stiffens, I shape it to how the wind is to affect it.
I also put the pole on or pinch out the sides where the ribbons attach it to the pole, etc.
When the whole thing is dry, I paint the base color of the flag around the decal, then remove the decal (scrape it off or use decal remover) and this leaves the outline, in the right places, despite the waves and folds, for me to paint the design.
I've completed one this way with great satisfaction as to the end result and am working on a second. I'd be glad to send pictures if that will help.
Whew..... and that's all that I have to say on that.
Hope that helps some.
Best,
Kevin D.