I cannot place the term "flagged"?
my understanding of "flagged" is it has been marked because there is some known issue with the device (based on serialnumber)
what issue this is about is unclear from your information
it may be the device is from a series with a known technical defect (hardware or software)
this should be no limitation for creating an RMA.
but if this concerns a series of devices so your distributor needs to take action on this to check all devices received by him
it could be the device been sent to a country where it should not be because of export restrictions ?
or the access point has been marked missing during shipment from Cisco to a customer
or it could even have been reported stolen !
in those cases the legal process would be as suggested by Cisco,
resulting in an audit of the distributor to find out how this could have happened
your post does not sound as if you yourself need to worry about this?
so just create the RMA, have the flag removed and let the distributor be audited
to keep a good relationship with your distributor I do suggest to inform your distributor about what is going to happen
your distributor may even chose to register the RMA himself ?
