If many people flag the same project, it will be removed and checked by the Scratch Team. Whenever you flag anything, a member of the Scratch Team will review it, and decide whether or not it is suitbale for the Scratch community.
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If you flag someone's project, it gets reviewed by somebody on the Scratch team. If they find that the project is in violation of the Terms of Use, they will remove the project. If enough people (and I don't know what the magic number is) flag a project, it will be removed automatically.
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