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The flashback always struck me as incredibly screwy, but I'll bet I know what happened.  If you substitute another actor for Lugosi as the goatee'd Nazi surgeon, it makes a helluvalot more sense. (OK, yes, you lose a juicy Bela scene, but at least the plot starts to be less than insane.) 

M. Colombe looks exactly like Dr. Melcher sans goatee.  These japanazirat two-faced spies surely would have recognized him as the guy who carved their faces up, yet in the movie, they're all dumb as rocks and don't notice. 

But if you cast another actor (Henry Victor?  Oy.) as Dr. Melcher, now it sorta makes sense. He's thrown into a cell with a stranger and gets the great idea that he'll surgically transform himself to look like this other anonymous prisoner (and presumably work vice versa magic on that guy's face to make him look like "Dr. Melcher.").  Then you at least can go, "Aha!  That's why they don't know it's him!" (We know by common sense as well as watching the movie that the process of plastic surgery takes a long-assss time and isn't something you improvise in a jail cell... but what the hell.)

But here?  What is to be understood from what the movie actually shows us?  The Nazi doc is betrayed, thrown into a cell with a guy who seems to be his long-lost twin brother, and apparently gets the idea that, if he uses the sharp blades of his handy surgical kit, he can shave off his beard and pretend he's his own twin.  Ummm... then... uhh... he gets away somehow by pretending he's the other prisoner... and... uhhh...)

At least there's a lot of murders.