I created/exported the flag as another image basically (that way I could use it for multiple things if I wanted to). After creating my outline, I just dropped it in as an image and converted it to a curve.
Did not even know that doing that would produce the same effect. Thanks PixelPest.
I still am a little puzzled however, like I said in my original post, I've done something similar to this (using a compound) tons of times and it's never done that before. Any idea why it would suddenly behave differently? Perhaps it has something to do with the fact that this was the first time I did it in 1.7?