Run the displace filter using the map created from step 1 on one of the flag layers
step 5 of 7
Use the hand from the source image as a clipping mask for the displaced flag layer and lower the opacity
step 6 of 7
Position the second copy of the original flag image below the hand layer and run the Ocean ripple filter and add an adjustment layer to reduce the brightness/contrast of the background slightly
step 7 of 7
Final step was to add a layer style effect to the background. I used a inner stoke to frame the flag and give the appearance of the hand sitting in front of the frame.