From a lesson in "Photoshop CS3" by Mark Galer and Philip Andrews. With this technique you use a channel to make a "displacement map" that allows an image on a new layer to follow the contours of the layer below, in this case, a flat flag follows the contours of the face. It's a fascinating exercise to follow and one with which I will do further experimentation. (IStock image - not mine)
This effect is really perfectly done and the result is quite evocative and effective.
I have not any idea about the way to do that, so you have all my congratulations and admiration!
Marisa