Hello. To change a flag you have to modify these files and include them in your .PACK file with its corresponding path. The important files are those of the "rigimodels" folder that are those that appear in battle. The files of the UI folder are for the menu interface.
Example of change the flag of Spain ("flags2.dds" file):
It's not necessary create the animation TGA files so that the flag is toss up, because it will only appear in the faction selection menu. You can use the same image without animation for all animation files. It's optional.