Let me use a metaphor to describe why non-local flagging is wrong: your favourite bar. You like your favourite bar because it is a bar that plays your favourite type of music (e.g., Jingle Cats).
Everyone in this bar is here because of the music. It is everyone's favourite music. Suffice it to say that these people like the sound of cats meowing to Christmas tunes too much.
And on your left is a guy named Reginald who just happened to come into the bar. He complains loud enough for you to hear that he hates this music and wants it changed. You are deeply offended by this man, so you flag his comment (e.g., call the cops).
Reginald's comment wasn't heard by a lot of people, so you didn't get the right number of Jingle-Cats lovers to grab him and toss him out of the bar.
Next the cops show up and you explain the situation. They don't understand how deeply you love Jingle Cats and how much Reginald has offended you and so they ignore you and go on to rescue a puppy from an alligator (rightfully — you're kinda crazy).
In this case Reginald, offensive as he is, was left alone by the authorities because his offense is local to the traditions of the bar patrons. Any regular of the bar would want Reginald thrown out, but no authority will understand their reasoning. Reginald remains at large.
Now, this is exactly the problem with flagging in chat. By design it requires non-local users (moderators, 10k users) who happen to be online and aren't likely to be regulars of your chat room and won't know what is and is not terribly offensive to the culture of its members. This kind of authority-requiring flagging works for actual offenses (like if Reginald had stabbed somebody) but doesn't help in removing bad apples who are offending those who define the room.
Going from there, the problem with overflagging in chat is solved by giving users the ability to deal with problem users locally without having to go directly to a non-local authority. I'm not going to suggest a particular method for introducing this ability. I just want to be clear that you're trying to solve the wrong problem. Jingle Cats forever!