The text is wrapping correctly but the graphic is sitting on top of the text so the white parts of the image are obscuring the text. It appears that you can't send the graphic behind the text, despite the option to do so in Word (Right click graphic > Send to Back > Send Behind Text)

As Moonshine said, you will need to use a graphic which has transparent parts (instead of white).

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Andrew Lockton
Chrysalis Design, Melbourne Australia